As crisis grinds on, European Council meeting may provide glimmer of hope

Fri, Jun 22, 2012, 01:00

ANALYSIS: EUROGROUP YESTERDAY. Ecofin today. European Council next week. These meetings – the first two involving finance ministers, the last bringing EU leaders together – are not unscheduled and are of a kind that have been going on for years.

But while European finance ministers will today be talking about non-crisis issues, such as taxing energy and the usual plethora of fiscal discipline matters, the crisis – monotonously – will dominate.

If it weren’t so serious, most normal people would be thoroughly bored by a crisis that has gone on for 2½ years.

If reports from the G20 meeting in Mexico this week are anything to go by, the rest of the world’s leaders are increasingly angry, apprehensive and perplexed by the persistent unwillingness of Europeans to do more to save their currency (and everyone else from the effects of what will happen if they don’t).

The G20 meeting showed, yet again, that within the space of a few years the EU has gone from being a model of interstate co-operation to being exactly the opposite. If this is what happens when you pool sovereignty, says the rest of the world, then keep it.

The loss of model status, and with it influence and “soft power”, is a long-term issue. In a crisis as serious as this, short-term survival is paramount.

Without a radical policy response, Spain and Italy will be unable to raise the money to pay off the tens of billions of euro of their debt that matures in any given month. That is – and always has been – the point at which Europe’s crisis turns to meltdown.

The euro zone bailout funds might just be able to cover all Spain’s financing needs for a three-year period. But if they have the wherewithal to rescue the world’s 12th-largest economy, they have nothing like enough firepower to bail out Italy, the world’s eighth-largest. Its government debt in absolute terms is three times Spain’s.

In the second half of last year the two nations moved repeatedly into the danger zone. The arrival of Mario Draghi at the European Central Bank in November came six weeks before that institution’s decision to change the terms of its lending to the banking system. Two €500 billion injections of cash before Christmas and early in the new year calmed the crisis for a while but the effect bought even less time than might have been hoped for. Spain was partially bailed out less than two weeks ago.

It is hard to tell how much of a difference Draghi has made, so unwieldy and impenetrable are the ECB’s decision-making structures, but the extent of his radicalism (or lack thereof) might be visible next week.

He is one of four “wise men” drafting recommendations for next week’s leaders’ summit. Along with two other heads of EU institutions and the prime minister of Luxembourg, who also chairs the informal “eurogroup” of finance ministers, they can claim to have collective European interests at heart rather than merely national interests.

If Draghi’s influence is hard to measure, the new French president’s is much clearer. François Hollande has changed the power dynamic and does not back Angela Merkel unconditionally, as his predecessor did. The resultant isolation of Germany is one reason why there is a sense that next week might just be different – Europe might exceed expectations, not dash them.

The EU has gone from a model of co-operation to the opposite