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…