Euro crisis: “It is a debt crisis but a crisis, too, of legitimacy.”

Credit ratings agency Moody’s has downgraded two major French banks ahead of crisis talks between President Nicolas Sarkozy, German Chancellor Angela Merkel, and Greek Prime Minister, George Papandreou.  BBC business editor, and still everyone’s hero, Robert Peston explains why.  And Greece isn’t their only concern.  Nor are they the only ones taking an interest.  [Adds – More on the interest elsewhere].  The Guardian’s business blog is live-blogging today’s events…

And, even though they “know how difficult a treaty change will be”, that’s precisely what the President of the European Commission, José Manual Barroso, et al, are calling for.  As BBC Europe editor, Gavin Hewitt notes, they come not bearing gifts, but threats.

In the absence of a plan, officials have turned to shock treatment. This was the moment to frighten.

First up, European Commission President Jose Manual Barroso, for whom this is now an existential crisis. “We are confronted with the most serious challenge of a generation,” he told the European Parliament in Strasbourg. “This is a fight for the jobs and prosperity of families in all our member states. This is a fight for the economic and political future of Europe. This is a fight for what Europe represents in the world. This is a fight for European integration itself.”

In his final words the warning was clear; the whole vision for a united Europe is at stake.

Next up, Polish Finance Minister Jacek Rostowski. He warned that crisis could destroy the European Union. “Europe is in danger,” he told the parliament. “If the eurozone breaks up, the EU will not be able to survive.”

For the German Chancellor, too, there is no Europe without the euro. These statements come without any explanation as to why the EU would fold without the single currency.

Of course, we’ve heard this one before.

But, as Robert Peston notes, Barroso’s intervention raises the stakes.

Mr Barroso, in making the announcement to the European Parliament, said: “We must be honest: this will not bring an immediate solution for all the problems we face and it will come as an element of a comprehensive approach to further economic and political integration.”

Although he is downplaying expectations that these euro bonds would be the cure for the eurozone’s malaise, he is taking quite a risk.

If euro bonds are proposed formally and then rejected by Germany, which looks quite likely, perceptions will only be heightened that eurozone governments lack the will and means to stem this crisis.

In the FT, via the Irish Economy blog, Martin Wolf has a neat summary of Frau Bundeskanzlerin’s dilemma. [free reg req.]

What should happen if the German government decided that it could not support such a bold step? The ECB should go ahead anyway rather than let a cascading collapse unfold. It would then be up to Germany to decide whether to leave, perhaps with Austria, the Netherlands and Finland. The German people should be made aware that the results would include a soaring exchange rate, a massive decline in the profitability of Germany’s exports, a huge financial shock and a sharp fall in gross domestic product. All this would be apart from the failure of two generations of efforts to build a strong European framework around Germany itself.

Germany possesses a binding veto over efforts to expand official fiscal support. But it is losing control over its central bank. In a crisis so menacing to Europe and the world, the one European institution with the capacity to act on the requisite scale should dare to do so, since the costs of not doing so are bound to prove devastating. That will surely create a political crisis, but this would be better than the financial crisis unleashed by a failure to try.

In the end Germany must choose between a eurozone disturbingly different from the larger Germany it expected or no eurozone at all. I recognise how much its leaders and people must hate having been forced into a position in which they have to make this choice. But it is the one they confront. Chancellor Angela Merkel must now dare to make that choice, clearly and openly.

As Gavin Hewitt points out

President Sarkozy told his cabinet France would do everything in its power to save Greece. Angela Merkel echoes that. But the core of the eurozone problem is this: High debts. No growth and a fragile banking system. The problem is that public opinion – particularly in Germany – has hardened against further aid for Greece or elsewhere. The Greeks too are stubbornly resisting the years of austerity that lie ahead.

Mr Barroso said the answer was more integration, more Europe. That is the dangerous fork in the road. The officials believe that the only answer lies in economic union but they have not brought the people with them. It is a debt crisis but a crisis, too, of legitimacy. [added emphasis]

What the Germans are being told is that the future of the EU is on the line – and that might give Chancellor Merkel some room for manoeuvre. But events have their own momentum.

Indeed.  And commenters here on Slugger would do well to focus on that crisis of legitimacy, rather than the other one.  [But will they? – Ed]  Probably not…

ANYhoo…  It’s still “the political trilemma.” 

[Europe is still sexy! – Ed]  Of course it is.

And, as I’ve been saying, for supporters of the “European Project”, the options are stark.

And when it’s that serious, you have to lie…

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  • Pete,

    Annoyingly, it’s behind The Times paywall, but Anatole Kaletsky’s piece yesterday suggesting that the Eurozone could survive – but with Germany out of it – is worth a look (if only to get the brain turning over).

  • DC

    Yes Paul but it’s a bit like removing London out of the UK and turning the ‘City’ into a republic, there are some very good pros with that idea, and indeed some cons, but highly unlikely!

    Why would Germany write itself out of control over large parts of Europe – on trade deals and other vital agreements?

  • DC

    Sorry – I take it you just mean the currency, but even still isn’t the eurozone all bound up with the EU project itself?

    Kind of like offering London sterling and giving out new currencies to the various other nations in the UK? Is it not still giving up control and power to other member states?

  • Pete Baker

    Anything’s possible, Paul, I suppose…

  • Regarding the “legitimacy”, young folk probably don’t know that the reason for the moves towards integration initially were designed in the 1950s to ensure that another war in Europe could never happen.

  • Between the major powers, that is.

  • Alias

    Actually, Joe, it was created by French government as a follow on from the Monnet Plan so that France could retain control of Germany’s principal coal and steel regions which were awarded to France as part of the spoils of WW2. The divison of Germany after the war and the creation of organisations such as NATO and the UN put an end to its warmongering in Europe.

    It remains the case that there is no European demos, despite the EU squandering 2.4 billion of taxpayers’ money every year in its propaganda budget to create a bogus ‘legitimacy’ via social engineering exercises. There is no European nation, and there will never be such a nation, so the EU can never have any democratic letigimacy.

  • DC

    I reckon a new Europe of Germanic languages should be formed, leaving the French and its grand ideas along with the southern / eastern states.

  • Alias

    Actually, DC, one of the conditions of the Monnet Plan implemented after WW2 was that the German population in the coal and steel regions of Germany that were to be controlled by France after the war were forced to learn French as their first national langauge…

  • Alias

    Not that I would doubt you, but would you have a link to your source?

  • No link; people can draw their own conclusions about the worth of Alias’ postings.