A German joke is no laughing matter

Acknowledgements to the telegraph.co.uk web site

Fiddling as the euro burns

It is, said the foreign minister whose country holds the EU presidency, "the edge of a precipice the scariest moment of my ministerial life."

By Andrew Gilligan

03 Dec 2011

The chief executives of Shell, Unilever and Phillips called it "one minute to midnight." Even the EU's own financial affairs commissioner, Olli Rehn, says Europe only has ten days to stop the euro falling apart.

By this coming Friday, the ninth of those ten days, the continent's leaders are supposed to have agreed a plan that satisfies the markets and gives their tottering currency a future. They have tried, and failed, three times this year already. A fourth failure would probably be the end. But in the Brussels corridors, with the sands fast running out, you really wouldn't know that these are perhaps the most dangerous times in Europe since the Second World War.

At the Berlaymont, the Commission HQ, on Thursday, they were proudly launching their "better airports package." "There is no Commission proposal for the auctioning of new airport capacity," explained an official. "The decision was to go ahead with liberalising the secondary trading of existing slots." Across the road the European Council, the ministerial decision making body, was busy on a resolution deciding that member states must "combat negative stereotypes regarding older persons" and demanding that "optimism has to prevail in the EU." The week before, the Commission announced a new drive to "protect our sharks," proclaiming it a "very good day, not just for European sharks, but for sharks worldwide." The sharks in question were the finned, not the financial, variety.

The European Parliament was doing a little better. Mario Draghi, the new head of the European Central Bank, addressed MEPs on ways out of the crisis. His speech was easily the most important thing said in this particular building for years. Amazingly, however, he made it to an almost empty chamber. Of the 736 MEPs, about 700 – or 95 per cent – were elsewhere. Still, never mind. They had a key meeting later on the subject of "online gambling at a policy crossroads: towards an EU regulatory approach or increased member states' co-operation?"

Parliament still teemed with people discussing the EU unitary patent and the Euro-Ukraine association deal. MEPs and their staff could still have their hair done at the "Guy Alexandre" salon. In the members' restaurant, there was honey – or rather filet de poulet avec sauce chasseur – still for tea. But as the world's most expensive ship, with its glittering passenger load of ex-social workers from Brighton and lecturers from Lower Saxony, sailed closer to the iceberg, you could hear the distinct sound of deckchair rearrangement.

It is because the EU, at all levels, has consistently failed to rise to the occasion that it now finds itself in a position where it might never pass another "better airports package" or online gambling policy crossroad; where its currency, the euro, might not reach adolescence, let alone old age; where merely declaring your support for something – optimism, say, or economic and monetary union – is no longer enough to make it succeed.

"I don't know whether we will have an EU in six months' time," says Sharon Bowles, the British Lib Dem MEP who chairs the parliament's economic and monetary affairs committee. Asked whether she meant the EU or the euro, she said: "I don't think we'll have either it's game over." Ms Bowles and the Commission's president, José Manuel Barroso, are among those pushing one of the only things which can halt the slide – the creation of "eurobonds," mutual debt instruments backed by all the euro states collectively, with the strongest standing behind the weaker ones. But both eurobonds, and any use of the European Central Bank as lender of last resort, have been blocked in the place that would have to pay for most of them, and which really makes the decisions these days: Berlin.

Along the EU's 24 miles of neutrally-carpeted corridors, in all its airport-style bars with their little high tables and chairs, there is a feeling of powerlessness and denial. Asked to sketch out what would happen if the euro went down, one top official said: "I am trying not to think about it." There are reports, including in the Economist, that commission staff have been scrabbling around for ways to protect their savings, though local banks told The Sunday Telegraph that they had seen no increase in withdrawals. The shark protection initiatives and the rest are not just the bureaucracy grinding on as usual; they are important displacement activity to take people's minds off catastrophe.

One staff member for a pro-European British MEP laughed as she played me the latest YouTube video from the European Central Bank on her smartphone: a new six-minute PR film to "celebrate" the tenth anniversary, next month, of the introduction of the euro. "Europe is more than just a place on the map," purred the commentary. "With its shared values and achievements, Europe builds bridges and inspires hope." "It's surreal, isn't it?" she said. "At a time when Europe is going back to being just a place on the map, they do this." The Germans' solution, as their chancellor, Angela Merkel, announced on Friday, is essentially to make the whole of Europe more like Germany: a fiscal Euro-superstate or, more unkindly, a financial semi-dictatorship. Euro countries' taxation and spending would be placed under much tighter control from Brussels to stop the kind of "misbehaviour" that has got Greece and Italy into trouble. The French support the idea too, though they want it to be done inter-governmentally rather than through the EU.

The EU is perhaps not the ideal organisation to enforce fiscal discipline. It is, of course, a body whose auditors have for the last 17 years running refused to sign off its own budget because of "material errors" amounting, last year, to 3.7 per cent of all its expenditure. The EU's financial control systems were, the auditors said, "only partially effective." Nearly 40 per cent of its agro-environmental aid budget, they found, went to farms on which there were no environmental problems on site or within a seven-mile radius. And the EU budget is a mere £105 billion, a minute fraction of the sums it is supposed to be supervising under the German plan.

But there are bigger problems with Berlin's idea than that. First, it will need time to take effect: time that the euro may not have. It will have to be agreed, probably with a treaty amendment, then implemented successfully, perhaps in the face of significant opposition from electorates. And even more importantly, it might be the wrong answer anyway, on its own.

The Germans believe that "the structure of the eurozone is fine, all you need to do is cure errant behaviour within it," says Philip Whyte, senior research fellow at the pro-EU Centre for European Reform (CER).

"To me, that doesn't cut it. The structure itself is badly flawed, and to compensate for those flaws they are imposing the policies of the 1930s. The only way the likes of Italy can repay their debts is to grow, but austerity is killing growth and making the problems worse." In Greece, the country furthest along the road, austerity and discipline is clearly not working; the cuts have hammered domestic demand and driven Greece even further into debt. It is hard to see how Greece can realistically stay in the euro. A Greek exit would put further pressure on Italy.

"My hunch is that [next week's] plan will fail. It is not going to be enough," says Whyte, who says there is now a "fifty-fifty" chance of the euro's collapse. "We already have a slow-motion run on the banking system in certain countries. If that starts gathering pace, and we start having TV pictures like Northern Rock, it could spread very quickly to Italy or Spain." By the end of last week, the panic had subsided a bit: Italian bond yields fell back to about 6.5 per cent. Senior figures in Brussels were sounding a bit more hopeful. "In return for her fiscal union, we are hopeful that Mrs Merkel will, at this week's summit, make some kind of movement towards allowing shorter-term fiscal relief," said one high official. "She is under pressure from a lot of countries and she does not want to be held responsible for the collapse of the euro." There is talk of essentially laundering extra bail-out money through the IMF, or turning the bail-out fund itself into a bank. Even eurobonds are hovering somewhere in the background.

Mrs Merkel is moving. For some, the key question is whether she will move far or fast enough to save the euro. But as the currency tries to couple together fundamentally divergent economies, the more important question is whether anything can save it.

Opposite the Euro-Parliament, with spectacularly bad timing, a new visitors' centre has just opened extolling the "fascinating world" of the EU. In classic fashion, it is three years late and 50 per cent over budget (a bargain £15.5 million.) There's even a souvenir shop, where you can buy euro note tissues and a wall-clock in the likeness of a one-euro coin. Sales, alas, have been slow.

Desperate-looking teenagers, dragged along by their schools, pass a long montage of pictures intended to depict Europe's journey from nationalist darkness into the EU light. The Fifties, quite a prosperous time for most, are shown as a decade of poverty and gloom, but once the EU gets going the pictures cheer up. The ones showing scapegrace Britain are mainly of riots, protests and derelict factories throughout.

"National sovereignty is the root cause of the most crying evils of our time," says a quote, in English, on one wall of the exhibition.

"The only final remedy for this supreme and catastrophic evil is a federal union of the peoples." But right by this inspiring statement, a group of Italian tourists is struggling with their state-of-the-art audioguides to get it translated into their own language: as good a demonstration as you could want of the essential fantasy of a federal union, and the enduring nature of national difference.