Margareta Pagano: Are we on the brink of a new European era?

All of a sudden, there's a change of mood among Continental leaders, and, maybe, some hope of a solution to the eurozone muddle

When the historians come to write up their accounts of Europe's sovereign-debt crisis, it may well be that this coming week proves to be the one in which a resolution is reached – at least pro tem.

Clearly it's dangerous, if not plain daft, to predict such seismic events, but there seems to have been such a mood change among the Continent's political leaders over the past week that it suggests they have finally got their act together to agree a deal which solves the eurozone muddle.

At the heart of the crisis, the problem has always been a relatively simple one – Angela Merkel would not play ball and underwrite a bail-out until she was convinced that those countries struggling with mountains of debt, such as Greece and Italy, would be able to demonstrate that they would – and could – stick to their austerity plans. Merkel knew that if she were to budge on this, she would not only lose her delicate electoral support, but German taxpayers would be in uproar over the injustice of hard-working Germans supporting the supposedly less-hard-working southerners.

But I also think Merkel had intuitively picked up on a more subtle reason why Germany couldn't take the high ground earlier in the crisis: she was nervous of a historically aggressive Germany being seen once again as the aspiring leader of Europe. That's why, perhaps, Merkel needed the other countries to submit to Germany's austerity drive without her own country looking as if it were in complete command. And, if you think back over the year, it rather looks as though Merkel has won that battle; since February, there have been five new governments across those eurozone countries – one by one the old guard have fallen and there have been new leaders first in Ireland, Portugal, Spain, Greece, and now Italy. It's in Italy, perhaps the most volatile of all the debt-ridden countries, that there appears to be the biggest swing towards a serious budget. The new Prime Minister, Mario Monti, demonstrated again last week that the country would certainly aim to cut its deficit within three years.

So why did the mood change so swiftly? First, there's the little detail of a looming credit crunch affecting the entire continent. You only have to look at the inter-bank lending market to see how frozen this has become. In fact, those banks which have excess money at the end of a normal trading day prefer to put their money with the temple of safety, the ECB, rather than lend it to each other as usual. That they are prepared to do this and so earn a pittance on their money – there's an annualised interest rate of just 0.5 per cent, rather than the 1.25 per cent or so they would earn if they lent to other banks – shows how scared they are. According to the ECB's own numbers, the overnight money on deposit with the central bank has risen from virtually nothing in September to about €300bn today. If you want to know what a credit crunch looks like, then that should be enough evidence.

Remarks from the ECB's Mario Draghi, that a "fiscal pact" could help pave the way for a tougher policy from the ECB to help contain the contagion also helped the change in mood. His hints of more aggressive bond buying, and even limits on the differentials – the spreads – between German and other debt cheered up the markets. It wasn't quite the offer of eurobonds that some people are pushing for, but it was a helpful sign that the ECB will play a bigger role.

Then there was the co-ordinated central-bank action earlier in the week to help improve dollar funding for the European banks starved of dollars over the past few months, as the US money-market funds have not been lending. This was yet another sign that the central-bank authorities – the inclusion of China was another positive sign – are likely to keep pumping liquidity into the system over the next few weeks until a deal is agreed.

But the big game-changer is that Merkel will meet with Nicolas Sarkozy in Paris tomorrow – ahead of Friday's summit – to come up with plans for an EU treaty change to boost fiscal integration in the eurozone to ensure tighter control over the budgets of recalcitrant countries. In turn, Sarkozy has also promised Berlin that Paris will accept stronger control over its national budget, and he may well need to recapitalise the French banks as part of any package.

Ironically, Sarkozy has been promising to reform France's archaic public sector but hasn't done so, either because he couldn't persuade his fellow politicians or didn't try hard enough. Now getting a deal with Berlin gives him the excuse, and no doubt helps him seek re-election next spring.

If the two leaders come up with a deal, then Merkel wins too – she can tell her voters that in return for underwriting the troublesome countries, those countries promise to stick by the new rules. Treaty change is not the only solution to this crisis, but if Italy, Greece et al can stick to their fiscal plans and get on with their own internal devaluations then it will be less painful than dropping out of the euro.

And now, I'm going to stick my neck out a little further and suggest that if Merkel pulls this off, she could turn out to be the most significant politician in European post-war history. Who knows, a new Bismarck?

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Beverley James: Accounts Payable

£22,000 - £23,000: Beverley James: Are you looking for the opportunity to work...

Beverley James: Accounts Assistant

£30,000: Beverley James: A fantastic opportunity has arisen for a person looki...

Day In a Page

HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower