A cat's cradle of problems that has been talked round and round

12 April 2012

Don't get your hopes up. European politicians entered the final hours of negotiations before this latest summit to tackle the eurozone crisis with too many unanswered questions for them all to be resolved satisfactorily in the next 24 hours.

It was ever thus: Greece's debt woes, which threaten a fresh round of banking collapses, have been a clear and present danger since July.

The trouble is the political challenges associated with thrashing out a solution have hampered progress. Angela Merkel and Nicolas Sarkozy have a good idea of what to do, just not how to get elected again after they have done it. And when they aren't weighing how it will go down with voters, bureaucrats are also busy second-guessing the market reaction to their Grand Plan. Can lenders to Greece forgive sufficient debt for the country to get off its knees? The 21 per cent borrowing haircut agreed in July will have to be increased to nearer 60 per cent. And if that happens, can the banks with giant exposures to Greece be prevented from going under themselves?

It is a cat's cradle of problems that has been talked round and round for months. At their heart is the fundamental failing of eurozone, which was created around a single currency, but the bloc of now 17 countries never thought to set up a unified regime to manage itself. Only in recent months did the president of the European Central Bank set out proposals for a European finance ministry to oversee fiscal policy. Joining up was a one-way street. There is no route planner for anyone to quit or be ejected. With Greece on the edge, it leaves Merkel and Sarkozy facing a stark option of closer ties or the death of the euro. Breaking up is certainly enough to send Europe spiralling down into a broad economic depression. There are also unintended consequences to consider. The proposed blanket promise from the European Central Bank to buy up unlimited government bonds in troubled Italy and Spain has the immediate effect of banks and governments feeling less pressure to put their own affairs in order. The biggest step forward that can be agreed today is expanding the firepower of Europe's bailout fund, the European Financial Stability Facility. But that may only happen by dragging in the International Monetary Fund as a contributor.

That might finally represent the "bazooka" that David Cameron has talked of so enthusiastically. But it also means that the endgame for the eurozone crisis could well see Britain providing some of the required firepower, too.

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