There will be global action to support the world economy if everything goes pear-shaped, but things are not yet bad enough and, meanwhile, it is up to the Europeans to sort out their act. That's the main message from the G20 summit in Mexico – not quite as high a waffle factor as there might have been, but with the eurozone as the whipping boy for messing up the world economy for everyone else. The dinner was cancelled between President Obama and the heads of the four eurozone countries at the summit, a clear sign of US irritation.
In the absence of any concerted international action, expect individual central banks to try and boost demand in their own economies. Last week, we had the plan by the Bank of England to increase bank lending to commercial companies, while the latest fall in inflation has led to suggestions that there may be another bout of qualitative easing next month. More important, the US Federal Reserve is holding an important two-day policy meeting and may announce plans to boost the economy later today. The idea is that it might borrow more short-term money instead of issuing so much longer-term debt, thereby cutting long-term interest rates more generally. But the Fed, like everyone else, may hold its fire until it knows more about what will happen in Europe.
That is where the spotlight now swings. There will be a EU summit on 28 June, and, meanwhile, the daily deluge of stories about the Greek cabinet, the Italian austerity plan and Spanish 10-year bond rates will continue. The world has come to a pretty pass when we all have to worry about Spanish bond yields: they reached 7.29 per cent yesterday, by the way, which says that Spain will join Greece, Portugal and Ireland in needing a sovereign bailout, not just support for its banks.
If the next couple of weeks follow the usual pattern, they will be dominated by more ill-tempered debate in Europe about the unwillingness of Germany to pay everyone else's bills. Of course, the point will not be made as bluntly as that. It is wrapped up in calls for "solidarity"; in the argument that Germany has benefited from eurozone membership because that has held down the price of its exports; and that German-inspired austerity is hurting Germany itself by damaging the rest of Europe. Its critics say it must be less rigid in its attitudes; the German response is that the rest of Europe must adopt the same discipline as it has done. Eventually, Germany will cave in.
The key person, of course, is Angela Merkel. My feeling is that the pressure on Germany, and, indeed, on her personally, is profoundly unfair. Germany, remember, went into the euro at too high a rate and has spent the past decade scrunching down its costs – at the cost of stagnant consumption and higher unemployment than most of the rest of Europe. Having worked hard to do the right thing, it is now being blamed for urging others to do likewise. Besides, as Mrs Merkel has herself pointed out, though Germany is strong, it is not all-powerful. In a speech ahead of the G20 summit, she said: "... we're also aware that Germany's strength isn't infinite. Not even Germany's forces are unlimited."
She could have put the point even more strongly. Italy's sovereign debts are larger than Germany's. German demographic prospects are among the most negative in Europe: their workforce is already shrinking.
Its many critics see its insistence on tough bailout terms as an unwarranted expression of German strength, as a political failure in fact. Actually, it stems as much from fears about German weakness in the face of the burden of eurozone debts for which it is implicitly already responsible. So this wounded giant will have to carry on signing – reluctantly – the cheques.
The President and the precedent he ought to remember
Another European story is about to unfold: France's radical economic programme. We don't know the details and it may be that the beast will look different when we do, but President Hollande has now a decent majority in parliament, so has the authority to do pretty much what he wants. So there will be more teachers, a cut in the retirement age, an increase in the top rate of tax to 75 per cent and so on.
People will have their own views as to the wisdom of such action and it may well be that Britain will become the principal beneficiary. But the practical question is whether such policies can be sustained. There is a precedent: the government of the last socialist president, François Mitterrand. His initial economic programme in 1981 included a cut in the working week, an increase in holidays and the minimum wage, a wealth tax and so on. The aim was to boost economic growth. It failed, the franc was devalued, and after two years he did an about turn towards austerity with the "tournant de la rigueur".
Might history repeat itself? Well, Hollande was an adviser to Mitterrand, so at least he has form on the matter.