We know more about the short-term future of the eurozone this week than we knew last week, but the medium-term outlook remains as cloudy as ever. It must be odds-on that the plan now sketched in outline to allow Greece to default but keep the eurozone intact will be hammered out in the next six weeks. It is not certain and we will come to the consequences of that in a moment. But let's say there is an 80 per cent chance of agreement on the plan.
We know it has several elements. These include allowing Greece to default with bond-holders getting back only half the face value of their debt. European banks that might collapse as a result of this "haircut", a silly expression for such an unfortunate outcome, will be recapitalised. The various European central funds that are supposed to shore up the eurozone will be massively beefed up. The IMF will chip in some more money, not a lot. And the European Central Bank will cut rates, print more money, buy more European government bonds – in short, do whatever it can to keep the show on the road.
If all this happens, Greece keeps the euro for the time being, no banks will go bust, there will be enough money to do a further bail-out of Ireland and Portugal if they need it, and most important, enough money to persuade global investors that Spain and Italy will be supported, too.
If it doesn't happen – and there is a huge amount to be agreed and a huge amount of face to be lost by Europe's political leadership – then there will be an uncontrolled default, the banks will have to be rescued anyway, and economic and financial confidence in Europe will fall sharply. It won't be the end of the world, or indeed of Europe.
All this apocalyptic stuff from politicians seems to me to be more a reflection of their own lack of judgement and economic foresight rather than a rational response to the fact that one small member state cannot pay its bills. But this moment may be seen as a turning point in the EU's long-term development, for it will be clear that Europe has reached the limits of its present "ever closer union" model and will have to find a new one.
It will have to do so anyway. At some stage European integration will plateau. So the question is whether that move towards a plateau will start now, triggered by an uncontrolled default by Greece, or whether that shift of gear is some years off.
You can quite easily sketch a successful multi-speed Europe, co-operating on the things that are best settled at a pan-European level, and competing elsewhere. It is what we have in effect now – except that running the eurozone requires a higher level of co-operation than Europe finds easy to achieve. That multi-speed Europe could even diverge rather more.
Some aspects of regulation could return to the nation states, provided trade was not damaged. The euro would be retained but with fewer members, becoming an enlarged Deutschmark zone. A slightly looser confederation might find it easier to accommodate countries that are part of the European space, notably Russia, as associate members. Britain, or at least England, would probably be happier in such a relationship.
Such a Europe would be prosperous, or at least as prosperous as the combination of its great technical expertise but also its ageing population would permit it to be. We have to accept that inevitably Europe will account for a smaller and smaller proportion of world output, as the balance shifts to the emerging world. But it can and still will be able to deliver an enviable lifestyle for its people. And insofar as it projects power to the world, it will be soft power, through admiration for its cultural and technical achievements. This is not the vision of some Europeans, who would like to see yet more integration. It is not heroic. But it is a not a bad outcome.
So the question is whether we move towards this steady state in a controlled, orderly way or whether we have a big bang first. Europe ends up, I suspect, in pretty much the same place either way, though the former path will take longer and there are costs to that. It is not the sort of thing you are allowed to say in polite society but maybe, just maybe, the big bang in the shape of an uncontrolled default by Greece would be better than continued muddle-through.
Good reasons why panic has receded
Share markets are funny, aren't they? In their incoherent way they did manage to give some sort of early warning about the coming slowdown in the world economy by falling in the US and UK by more than 20 per cent and in France and Germany by quite a lot more. But if you look at the albeit modest recovery in the past few days, they seem now to have recovered some sense of balance, despite the fact that the mooted European rescue plan is, as noted here, far from secure.
So what should we make of this? Well, first, this is not at all the sheer panic of the Lehman Brothers period. Investors are worried and rightly so, but they are not looking over a cliff. Second, there is growth in the world – maybe not in the developed world but in the world as a whole. That affects London shares, which represent global demand as well as national demand. Third, even UK-orientated companies are not doing too badly and that, I think, reflects the disappointing but not dreadful numbers coming through here.
Not uplifting. But not the greatest catastrophe the world has ever faced.Reuse content