Bailouts will not drive the eurozone or the EU through the floor – but both will need running repairs
Yesterday, Dublin. Today, Lisbon. Portugal's caretaker government now has to choose between going for a bridging loan, for which no fund or mechanism yet exists, or negotiating a bailout of anywhere between €70bn (£61bn) and €80bn. Whoever Portuguese voters choose in June's election, their true boss will be a German, Angela Merkel, whose government will be writing the terms of the loan. If the examples of Greece and Ireland are anything to go by, it will not make pleasant reading.
One of the features of the post-crisis world is that the "surplus countries" – those who export more to other nations than they import – call the shots. China is a surplus country; so is exporting powerhouse Germany, and in the eurozone, that makes Mrs Merkel the one who has to be obeyed. The German chancellor may argue that she should have such influence over the bailouts of Greece, Ireland and Portugal, since it is her electorate who will end up having to shoulder most of the burden. Ja sicher. But the politics of these bailouts is what makes their economics so absurd. When dealing with a nation struggling to pay its loans, it would make more sense to restructure its debts – so they are paid back over a long period, say. In Ireland's case, that process should have gone hand in hand with an overhaul of the banking sector. Instead of which, euro bailouts have saddled supplicant countries with even more debt at high interest rates. This enables Mrs Merkel (and Nicolas Sarkozy) to show domestic taxpayers that their money is not being frittered away on feckless southern Europeans. It is indeed difficult to persuade Germans, who got their labour costs down, to pay for countries such as Portugal, who did not.
The European project was not supposed to be run this way. When Jacques Delors called the EU an unidentified political object, the economy was doing so well the union did not need to be defined. Gloriously, it seemed free to set its own rules. Since then, the EU has erred in both directions: two of the entry criteria for the eurozone – that deficits should be no higher than 3% of the GDP, and total debt 60% – turned out to be narrow and restrictive, and yet there were no contingency plans for undefined threats like a banking crisis. So each bailout has been ad hoc and panicky. Little wonder that Europeans are losing faith in the ability of their politicians to sort these continental contagions out, and are turning instead to "patriotic" alternatives, homespun attempts to erect national firewalls.
Our month-long New Europe series started with an ICM poll which revealed that only 20% of surveyed Europeans trusted their government to deal with their country's problems. Only 9% thought they would act honestly. Our neighbours and their political elites turned out to be in as much flux as we were, from the meltdown of Germany's CDU to the aspirations of France's Marine Le Pen, who has a real chance of repeating her father's 2002 performance by going through to a second presidential round. Europe's far right is on the rise. In Finland, Sweden, Denmark and the Netherlands, it has populist messages which bundle immigration, crime, Islam and bailouts in one portable package, gift-wrapped for those who think that their identity, as well as their jobs and way of life, are being threatened.
Neither the union nor the eurozone will fall through the floor, but both will need running repairs. Yesterday's decision by the European Central Bank to raise interest rates shows it has some way to go before common sense triumphs over dogma. But the mood is far from being pre-revolutionary, as Marine Le Pen would have us believe, because the underlying principle of regional co-operation is more relevant today than it has been ever before. Unloved and inflexible, it is going to be some time before the union finds politicians capable of leading it, but find them it must.