Germans and the French remain far apart on policy, on how to fix the crisis and on the political future of the eurozone
Ian Traynor, Europe editor
The Observer, Sunday 2 September 2012
Mario Draghi is expected to unveil intervention moves in Frankfurt aimed at capping borrowing costs for Spain and Italy.
After the traditional August lull, there is foreboding in Brussels and other European capitals about what lies ahead for the euro in the autumn. In what promises to be a momentous few weeks, the spotlight will fall first on Mario Draghi, head of the European Central Bank, who is expected to unveil intervention moves in Frankfurt on Thursday aimed at capping borrowing costs for Spain and Italy and preventing the crisis spiralling out of control.
Draghi faces the wrath of Germany's Bundesbank, which is withering about his plan to intervene in the secondary markets to buy up sovereign debt and prevent Rome's and Madrid's borrowing costs becoming unaffordable. Whether this will work is in doubt. Previous ECB interventions – buying Italian bonds last summer or flooding EU banks with cheap three-year loans – brought temporary respite for the currency, but no durable resolution.
The Draghi proposals will also come hedged with caveats and conditions that will delay ECB action, in effect piling the pressure on the eurozone's political leaders to take the primary role in dealing with the crisis.
A few days later, on 12 September, José Manuel Barroso, the European commission president, will deliver his annual state of the union speech to the European parliament as Brussels tables a draft law on a radical new regime for supervising and regulating eurozone banks. This represents a quantum leap in the way the EU is run, for the first time putting the eurozone's banks – at issue is how many of them – under the authority of the ECB, a massive increase in the central bank's powers.
The "banking union" is supposed to be the first step, followed by a fiscal union and ultimately a eurozone political union, in effect leading to a much more integrated eurozone political federation within a decade. This is roughly the German vision of where things are going or should go. The problems are immense. The arguments will be bitter.
Also on 12 September, the election in the Netherlands will reveal the extent to which Euroscepticism has grown among the Dutch, while Germany's supreme court will rule whether the eurozone's new permanent €500bn bailout fund, the ESM, is compatible with German law. It was supposed to start operating in July.
After this, the spotlight will turn to Greece and whether, following months of political paralysis, it is doing enough to meet the terms of its second bailout, whether it needs more money – in effect, a third bailout – and whether it is able to stay in the euro at all.
The European fiscal and budgetary police force known as the "troika" – and to the Greeks as "the men in black" – will descend on Athens this week to go through the books amid pleas from the Greeks that they need more time, and therefore more money, to meet the debt and deficit reduction targets imposed as the price of the bailouts.
There is little stomach across the eurozone for a third bailout, but there are also growing signs of nervousness at the impact a Greek exit from the euro would have.
In under three years of euro crisis, there have been umpteen "make-or-break" and "last-chance" moments for the currency, usually resulting in muddling through, doing just enough to gain a little more time, delaying the denouement to the Greek and the broader European drama.
How long that strategy can survive is anyone's guess, but the sense in Brussels is that the stakes are rising and between now and Christmas the euro's fate will probably be decided.
The most tired cliché in European affairs is the transport metaphor invariably used to describe the relationship between Berlin and Paris – the Franco-German "motor, "engine", "tandem", "axis". It remains truer than ever, however, that there can be no durable fix to the crisis without an accommodation between Angela Merkel and the French president, François Hollande.
Since Hollande was elected in May, he has mounted one challenge after another to Merkel's authority, climaxing in June when he sided with Italy and Spain to defeat the Germans at an EU summit.
Both sides acknowledged last week that things can't go on like this, agreeing to set up a high-powered working group to deliver common policies with both countries' finance ministers meeting fortnightly.
The Germans and the French remain far apart on policy, on how to fix the crisis and on the overall political future of the EU and the eurozone.
But the new arrangements will necessarily produce compromises for the long haul of gradually building a more integrated eurozone federation. First, however, the key leaders will need to navigate and survive what promises to be a very hot autumn.
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