Davos Outlook For all Nicolas Sarkozy's insistence that the euro will be defended at all costs – and his passion for the project is admirable, even inspiring – the French President has yet to explain how exactly that defence will be mounted. The fact remains that Portugal will almost certainly need a bailout – and sooner rather than later. We know what that means for its neighbour's banks and for the sovereign debt of Spain.
Do not assume either that the difficulties of Greece and Ireland have been definitively resolved. They may yet be forced to default on their debts, or at least restructure. As participants at Davos have been putting it all week, the Russian and Thai defaults of the 1990s came when their debts were at only 50 per cent of GDP. In Greece, the relevant figure will be 150 per cent.
One way or another, Germany and France will have to put their hands in their pockets once more. They can choose to do so early, by bailing out Portugal sooner rather than later – and by boosting the firepower of the European Financial Stability Fund – or they can do so further down the line, once the problem has been moved onto the books of Europe's banks, the eurozone's creditors. Either way, a rescue will have to be mounted.
The question is, of course, as political as it is economic. German citizens, very understandably, object to paying the bills of European people who retire sooner than they do, work fewer hours and spend more profligately. So in return for their support they expect to see some compromises on such matters. The good news, both for the single currency project and Mr Sarkozy's hopes of delivering on his promise yesterday, is that this is happening. Both Ireland and Greece are sticking to the swingeing austerity measures to which they committed as part of the bailout processes. The waves of social unrest that both countries have suffered as a result would, in times gone by, have blown them off course. Not today.
No one wants to see rioting in Greece or the rage that drove millions on to the streets in Ireland. But the one positive you might take from these confrontations is that they are proof the governments of these countries want the Germans to understand they are serious about mending their ways.
And you might say President Sarkozy is setting an example. The pension reforms he is determined to push through in France have proved as unpopular as the cuts seen in the periphery of the eurozone. But he has not wavered. Tough times, but at least the President practices what he preaches.Reuse content