Posts tagged "Europe"

Austerity will send Greece to hell, warns Alexis Tsipras

Syriza leader’s claims countered by Antonis Samaras, who says Greek government must not abandon reforms or quit euro

The two main figures in what promises to be Greece’s most electric election in living memory were on a collision course on Thursday, with one predicting “hell” if Athens adheres to EU-mandated austerity and the other forecasting a “nightmare” if the nation abandons reforms and gives up the euro.

Emboldened by yet another poll showing his party’s wide appeal, the leftwing Syriza leader, Alexis Tsipras, said the international accord that Greece had signed up to in return for rescue loans was catastrophic for the country. Instead of a rescue, the debt-stricken nation has been thrown into its worst recession since the second world war.

“With this policy [bailout agreement] we are going directly to hell,” he told CNN. “To save Europe we need to change direction,” insisted the politician who has pledged to “tear up” the €130bn (£104bn) “memorandum of understanding” that Athens reached with the EU and IMF earlier this year.

The 38-year-old, who has sent shockwaves through EU capitals with his fiery anti-austerity rhetoric, made the remarks as Syriza announced that he would be visiting Berlin and Paris next week for talks. It was unclear whom Tsipras would be meeting, although aides said the German chancellor, Angela Merkel, would not be among those lined up.

Within hours, the leading credit agency Fitch had downgraded Greece’s sovereign rating to CCC from B-, citing “the risk of a Greek exit from European Monetary Union … in the near term”.

Earlier in the day, Antonis Samaras, who heads the conservative New Democracy party, painted a very different picture in a speech that conjured images of a living hell if Athens quit the EU.

In the event of the debt-stricken country reneging on the pledges it had made, the road ahead would be a “nightmarish” one, he said.

Reversion to the drachma would mean wages, deposits and property values all being “cut in half”, and the price of imported commodities, such as food and fuel, skyrocketing, he predicted. “This is the nightmare that those who speak of a unilateral condemnation [of the loan agreement] will bring,” he told his parliamentary group at its last meeting before the 300-seat house is dissolved and the election campaign officially announced .

“The battle that begins the day after tomorrow for the new elections is not about any single party or its electoral influence,” said the 61-year-old politician, ashen-faced as he delivered the speech. “It’s about whether Greece will remain in Europe, a Europe which is itself changing. Or if Greece will be found to leave Europe, losing much and risking even more.”

New Democracy, he said, would form the core of the “front of resistance against catastrophe”.

After handing over to his successor, Panagiotis Pikramenos, a high court judge whose caretaker government will lead Greece to elections on 17 June, the outgoing prime minister, Lucas Papademos, also stepped into the fray.

The former central banker, who headed an emergency left-right “salvation government” that secured the EU-IMF sponsored deal, said he feared that sacrifices Greeks had made in the form of tax increases and pay and pension cuts would be lost if voters decided to back anti-austerity parties at the ballot box next month.

Greeks had endured the punitive cutbacks to put the economy back on track through fiscal consolidation, he said.

“The Greek people’s sacrifices were not an ‘empty shirt’,” said Papademos in an open letter to the nation, his last act before leaving office.

“Unilaterally renouncing the country’s loan agreement would be disastrous for Greece, as it would inevitably lead the country out of the euro, and possibly out of the European Union,” he wrote. “There are those who are waiting to benefit from the chaos that will follow the humbling exit of the country from the common currency.”

Next month’s poll follows an inconclusive election on 6 May which ushered in the rise of “anti-bailout” groups such as Syriza – the vote’s surprise runner-up – and decimated “pro-bailout” parties such as New Democracy and the socialist Pasok.

Speaking to the Guardian, senior Syriza officials insisted that the party, which polls suggest is poised to emerge as the biggest political force, had “no intention” of unilaterally revoking the accord.

“Austerity is over in this country and it’s the end of the memorandum of understanding,” said Takis Pavlopoulos, one of Tsipras’s top aides, referring to the accord. “You have to be a neo-liberal fanatic not to see that it [austerity] has failed,” he added, pointing out the record levels of unemployment and deepening poverty engulfing Greece. “But we will not proceed with any unilateral action that might question Greece’s membership of the eurozone.”

Greece, he said, had been among the original member states to sign up to the then EEC. As such, Athens was also a “co-owner” of the project and could not be ejected from a union it had participated in for over 30 years.

“Destructive austerity was not part of the deal for any member state to enter the eurozone. No one has the right to say ‘either you accept austerity or leave’,” added the US-trained economist.

Policymakers have claimed that renouncing the loan agreement will lead not only to a disorderly default – with ensuing chaos taking hold of a country whose economy is already on its knees – but possibly to the breakup of the 17-nation bloc.

Syriza argues that such claims are a high-stakes bluff aimed at safeguarding the status quo. Euro–exit fears were not reverberating around the corridors of the European parliament, insisted Nikolaos Chountis, the party’s sole Euro-MP.

“There are other voices that you hear that are very ambivalent about the policies being pursued in the name of resolving this crisis,” the MEP said. “And there are other countries that are in a very difficult position like Portugal and Ireland. All this scaremongering that is peddled here about Greece facing a living hell just doesn’t exist in Brussels.”

Fears that Greece would not have enough money to even pay public sector pay and pensions in the event of loans drying up were simply not true, said Panaghiotis Lafazanis, another Syriza MP. “The loans basically cover interest payments,” he said.

“They [the Europeans] can’t kick us out. The memorandum is not part of the eurozone institutional framework. It is a political choice that has been deligitimised by popular vote.”

Files close on BCCI banking scandal

Liquidators and lawyers acting for creditors to BCCI hold final meeting with victims of bank’s collapse

It took 21 years and $656m of fees paid to two firms of lawyers and accountants but yesterday the files were finally closed on the banking scandal – which ranged from arms trafficking to prostitution and ended with a £20bn collapse – that was the Bank of Credit and Commerce International.

Liquidators and lawyers acting for creditors to BCCI yesterday held a final meeting with victims of Britain’s biggest banking scandal. About 150 creditors sat in silence in Westminster’s Central Hall as liquidators from Deloitte and lawyers from Hogan Lovells explained how the battle for recoveries had taken them around the world – to “desert warehouses” and other remote locations where “documents were rotting in damp, humid and rat-infested rooms”. On some occasions the inspection of papers was only permitted under armed guard.

Ultimately Deloitte amassed a library of 95,000 box files containing about 100m chaotically ordered documents – material that spawned a welter of litigation around the world, including the unprecedented decision, eventually aborted, to sue the Bank of England, which was responsible for bank regulation at the time of the BCCI collapse, for misfeasance in public office.

The failure of BCCI also revealed a nest of corruption, money laundering and other secretive activities. Organisations as diverse as the CIA, Manuel Noriega and mujahideen guerrillas were linked to BCCI.

A damning forensic report was also produced by Lord Bingham in the UK, while in the US Senator John Kerry’s report to the foreign relations committee delivered his verdict in more vivid terms: “BCCI’s criminality included fraud by BCCI and BCCI customers involving billions of dollars; money laundering in Europe, Africa, Asia, and the Americas; BCCI’s bribery of officials in most of those locations; support of terrorism, arms trafficking, and the sale of nuclear technologies; management of prostitution; the commission and facilitation of income tax evasion, smuggling, and illegal immigration; illicit purchases of banks and real estate; and a panoply of financial crimes limited only by the imagination of its officers and customers.”

A string of more than 60 prosecutions followed, including, in the UK, that of Abbas Gokal, a businessman with intimate ties to the bank, who received a record 14-year jail sentence in the UK.

BCCI, which at its peak had 417 offices in 73 countries, collapsed in July 1991 with liabilities estimated at close to $20bn. Adding to efforts by Deloitte and Hogan Lovells on behalf of English creditors, legal and liquidation costs for other divisions of BCCI took the total bill for lawyers and insolvency professionals to $1bn.

Angus Martin, one of three joint liquidators dealing with BCCI’s UK estate, told yesterday’s meeting, held a stone’s throw from parliament, that the $369m bill from Deloitte represented value for money. He pointed to a recovery rate achieved for creditors of 90 pence in the pound. “I think it has been very successful. I don’t think anybody in the early days thought we were going to get anywhere near that figure.”

After the meeting Martin accepted the recovery figure had been flattered greatly by the passage of time and that a pound in 1991 would have a value today of £1.76. “Even that conservative calculation gives a figure of about 50%, which is still a good result is liquidations go.” An inflation-adjusted recovery rate is not given by Deloitte in the 78-page final report to creditors.

Many of those attending the meeting were elderly figures from an Asian background, reflecting the bank’s deliberate decision in the 1980s to target British communities with links to India, Bangladesh and Pakistan. Almost two decades ago, many of them had been among the thousands who descended on the first creditors’ meeting at Wembley Arena, a more angry affair.

At the 1994 meeting Keith Vaz MP, who had seen many Leicester East constituents caught up in the BCCI scandal, emerged as one of the loudest voices of scepticism at the huge sums of money being taken by Deloitte liquidators and their advisers. Yesterday Vaz was again in attendance. Outside the meeting hall he said: “This process has made millionaires of the liquidators. What we need is a proper inquiry into these liquidation fees. Why is this still important? – It has lasted 21 years; Lehmans [the US investment bank which failed in 2008] is going to be even longer. Government seems to think it has no role in this. That’s got to change.”

Martin said the liquidation process was greatly helped by the collaborative approach to asset recoveries taken by Deloitte and counterparts responsible for liquidating BCCI operations overseas.

That position is in marked contrast to the legal feuding which has characterised the early years of the Lehmans insolvency process, which in Europe is being carried out by PricewaterhouseCoopers. While Lehman was not infected with widespread criminality in the same way as BCCI, some of its investment banking activities represent a much greater challenge in terms of their complexity.

David Cameron urges eurozone to follow UK model for recovery

Cameron says eurozone is at a crossroads and urges it to adopt its own pro-business, pro-growth agenda

David Cameron has called on the eurozone to take a leaf out of the UK’s book in order to overcome its current crisis, insisting that the British economy was “moving in the right direction”.

The government’s austerity measures have been blamed by Labour for the UK suffering a double-dip recession, but the prime minister said the UK had achieved a balance between deficit reduction and growth that was lacking in the eurozone.

“Just as in Britain we need to deal with the deficit and restore competitiveness, so the same is true of Europe,” he said. “This is a debt crisis. And the deficits that caused those debts have to be dealt with. But growth in much of the eurozone has evaporated completely. Indeed without the recent German growth figures, it would be in recession.”

Polls show support for the government’s economic policy receding in the face of criticism that not enough is being done to stimulate growth.

But Cameron said the government had taken “active interventions such as credit easing, mortgage indemnities for first-time buyers and guarantees for new infrastructure projects” and urged the eurozone to adopt its own “pro-business, pro-growth agenda”.

Speaking in Manchester on Thursday, the prime minister said the eurozone crisis, uncertainty over the direction of the global economy and the struggle to recover from recession at home, meant the UK was living through “perilous economic times”.

He painted a bleak picture of the threat posed to the UK by events in Greece. “The eurozone is at a crossroads,” he said. “It either has to make-up or it is looking at a potential break-up. Either Europe has a committed, stable, successful eurozone with an effective firewall, well capitalised and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the eurozone. Or we are in uncharted territory, which carries huge risks for everybody.”

Cameron said that Britain could not cut itself off from what was happening elsewhere, but that he would “do what it takes to shelter the UK from the worst of the storms”. Warning of “dangerous voices” urging the government to retreat on cutting the deficit, he said: “Deficit reduction and growth are not alternatives. Delivering the first is vital in securing the second. If markets don’t believe you are serious about dealing with your debts, your interest rates rocket and your economy shrinks.”

The Labour leader, Ed Miliband, said Cameron had caused recession in the UK and bore responsibility with other European leaders for failing to come up with a proper plan for growth and jobs across the continent.

“He is the prime minister – he should be getting in there, getting it sorted out with Europe’s leaders,” Miliband told BBC News. “Sorting it out means not just sorting out the eurozone problems, but getting that proper plan for growth in Europe, just like we need a proper plan for growth here in Britain.

“The prime minister should be showing leadership, not looking like a man who is a bystander to events, shouting from the rooftops.”

Cameron will have a video conference call with the French president, François Hollande, German chancellor, Angela Merkel, and Italian prime minister, Mario Monti, on Thursday afternoon. They will be joined by the president of the European Council, Herman Rompuy, who suggested the discussion ahead of the start of the G8 meeting tomorrow, and the EU commission president, José Manual Barroso.

The business secretary, Vince Cable, speaking from Ellesmere Port, where more than 2,000 Vauxhall car manufacturing jobs have been saved, told the Guardian he was confident of a positive outcome to the Greek crisis.

“I am not Apocalypse Now about the European Union and the eurozone. There are risks around Greece but Greece is a very small country. The significance of Greece is if you get contagion, but I think that it is possible to be reasonably optimistic that Germany understands those risks and will put mechanisms in place.

“There are risks and worries and I am not minimising that. But there is every reason to believe that the EU will pull out of this crisis as Britain will.”

Asked what mechanisms he was referring to, Cable said: “We are talking about the firewall, the willingness of the European Central Bank to intervene, the understanding of the Italian and Spanish governments that if they play their part they will get back-up from, particularly, Germany.

“The eurozone has advanced quite a long way from the peak of the crisis. It ultimately comes back to Germany thinking they have done extremely well out of the eurozone, the competitive exchange rate. They have everything to gain from making sure this succeeds. And they are not just going to let it go down the pan.”

Vince Cable: no need for UK to panic over Greek crisis

Business secretary says creation of financial firewalls means crisis should not spread to other countries, including UK

The business secretary, Vince Cable, has warned Britain not to panic over a possible Greek exit from the euro, saying there is no reason why the crisis should spread to other countries.

His comments came as David Cameron prepared to use a keynote address to business leaders in Manchester to give his starkest warning yet on the plight of the euro. The prime minister will say that unless urgent action is taken there will be a breakup, but he will do whatever is possible to keep Britain safe in perilous times.

The former Tory chancellor Norman Lamont warned on BBC Radio 4′s Today programme: “I think we’re going to have a situation where an exit is inevitable.” He suggested the eurozone would have “to tell Greece to leave”.

Lamont said the crisis was profoundly destabilising: “The most damaging thing I think is this corrosive effect on confidence. We hear all the time demands for more growth – growth above all depends on individuals, and individuals will only grow their business if there is confidence.”

Cable told Today: “We need to get the risks in perspective.

“There clearly are risks to the UK. Greece itself is a small country, it’s only 2% of the European economy. The risks arise if the crisis were spread to other, weaker countries in southern Europe, but there is no reason why that should happen. They are in the process of creating firewalls to prevent the financial crisis spreading and we hope that they do.

“What we can do is to make sure that the UK is a well-run economy, and that’s combining an approach to growth and job creation – and that’s what we’re doing on Merseyside this morning – with maintaining proper discipline over our finances.”

Asked how Britain could prepare, Cable stressed that the UK had no direct influence over events in the eurozone as it was not a member.

“I don’t think there’s any reason whatever why in the UK we should be panicking or taking an excessively negative view,” he said.

Cameron’s message comes only a day after the chancellor, George Osborne, said speculation about the eurozone was damaging the European economy.

Cameron and Osborne now believe that with the failure of the Greeks to form a government, a direct warning has to be given to the eurozone leaders about the scale of the threat, and the need for urgent action.

Treasury sources say they have been arguing for a year for the introduction of eurobonds, as well as a looser monetary policy: “Without that, Germany is simply asking too much of the periphery countries who do not have the benefit of our independent monetary policy and flexible exchange rate.”

Cameron will underline the message at meetings with François Hollande, the French president, and the German chancellor, Angela Merkel, at a G8 summit in Washington this weekend.

In his speech in Manchester, the Tory leader will say: “Either Europe has a committed, stable, successful eurozone with an effective firewall, well-capitalised and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the eurozone, or we are in uncharted territory, which carries huge risks for everybody.

“But be in no doubt: whichever path is chosen, I am prepared to do whatever is necessary to protect this country and secure our economy and financial system.”

Alistair Darling, who as chancellor helped stop a run on the British banks in 2008, said the crisis in Greece was reminiscent of the run on Northern Rock, and that would look insignificant in comparison with a Europe-wide crisis.

“The banks in too many parts of Europe were not cleared out in the way we and the Americans did in 2008 – so when you get all this turbulence it just adds to a lethal cocktail.”

Sounding exasperated and worried about the unfolding crisis, Darling said: “The clear message that is being sent is surely now [that] they need to start thinking of a solution that is actually going to work, more than people expect.

“The big risk is when the money comes out [and] the banks don’t actually physically have the stuff to hand over, you get cash machines going off, the doors closing and you do get blind panic.”

He described the fiscal pact signed by EU member states as madness, since “it locks countries on the edge into a downward spiral like the Treaty of Versailles at the end of the first world war with the result that their economies shrink and the debts go up. This is just daft.

“Whatever they do, they have got to do it quickly, and do more than people expect, or else the situation will get worse. The warning signs are there – that is what should strike fear into the hearts of every finance minister in Europe.”

Cameron will insist that, domestically, he is not going to change course on deficit reduction despite calls from the business sector for some stimulus.

With polls showing support for the government’s economic policy receding, he will promise to take the right course and “not to dodge responsibility for dealing with a debt crisis but to lead our country through this to better times”.

Trying to give some sense of hope, he will say: “We are well on the way in this journey. Since we took office two years ago, we have cut the last government’s deficit by more than a quarter.”

Pointing to Wednesday’s news of rising employment Cameron will say: “Now more than ever this is the time to stand firm. Let me be clear: we are moving in the right direction– not rushing the task, but judging it carefully. And that is why we must resist dangerous voices calling on us to retreat.”

Promising not to return to the “something for nothing” economics that got Britain into its original mess, he will say: “We cannot blow the budget on more spending and more debt. It would squander all the progress we’ve made in these last two, tough years. It would mean more austerity, for even longer. It would risk our future. It’s not an alternative policy, it’s a cop-out.”

But Ed Balls, the shadow chancellor, hammered home his argument that the domestic recession had not been caused by Europe, but by decisions taken by the chancellor in 2010.

“Rather than being a commentator idly speculating about the breakup of the eurozone – which is irresponsible – he ought to have been out there for the past year arguing with Germany for Germany to do the right thing to get the single currency to work.”

Cost of Greek exit from euro put at $1tn

UK government making urgent preparations to cope with the fallout of a possible Greek exit from the single currency

The British government is making urgent preparations to cope with the fallout of a possible Greek exit from the single currency, after the governor of the Bank of England, Sir Mervyn King, warned that Europe was “tearing itself apart”.

Reports from Athens that massive sums of money were being spirited out of the country intensified concern in London about the impact of a splintering of the eurozone on a UK economy that is stuck in double-dip recession. One estimate put the cost to the eurozone of Greece making a disorderly exit from the currency at $1tn, 5% of output.

Officials in the United States are also nervously watching the growing crisis: Barack Obama on Wednesday described it as a “headwind” that could threaten the fragile American recovery.

In a speech in Manchester before flying to the United States for a summit of G8 leaders, the British prime minister, David Cameron, will say the eurozone “either has to make up or it is looking at a potential breakup”, adding that the choice for Europe’s leaders cannot be long delayed.

“Either Europe has a committed, stable, successful eurozone with an effective firewall, well capitalised and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the eurozone, or we are in uncharted territory which carries huge risks for everybody.

“Whichever path is chosen, I am prepared to do whatever is necessary to protect this country and secure our economy and financial system.”

Officials from the Bank, the Treasury and the Financial Services Authority are drawing up plans in the expectation that a Greek departure from monetary union – increasingly seen as inevitable by financial markets – could be as damaging to the global economy as the collapse of Lehman Brothers in September 2008.

With a second election in Greece called for 17 June, King dropped a strong hint that the Bank would take fresh steps to stimulate growth if policymakers in Europe failed to deal with the sovereign debt crisis.

“We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country’s history, the biggest fiscal deficit in our peacetime history and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution,” he said.

Doug McWilliams, of the Centre for Economic and Business Research, said a planned breakup of the single currency would cost 2% of eurozone GDP ($300bn) but a disorderly collapse would result in a 5% drop in output, a $1tn loss. “The end of the euro in its current form is a certainty,” he added.

Alistair Darling, who was Chancellor of the Exchequer under the former Labour administration, said: “This has the seeds of something disastrous. It is madness. If it spreads to bigger countries, this could be really disastrous for Europe. It could consign us to years of stagnation.”

Capital flight from Greece has increased since it became clear that a coalition government could not be formed after the election earlier this month. The Greek president, Karolos Papoulias, said citizens were withdrawing their money amid “great fear that could develop into panic” at the risk of a debt default and exit from the euro area, according to minutes of their meetings posted on the presidency’s website. In little more than a week following the election on 6 May, €3bn was withdrawn from bank accounts. The central bank reported that €800m was taken out in a single day earlier this week.

The head of the International Institute of Finance banking lobby, Charles Dallara, said money was leaving Greece at a growing pace due to political uncertainty. “There has been a pickup of deposit flight from Greece, but I think that is stabilisable once you get a new government in place, if that government reaffirms its intention to remain in the eurozone.” The damage to the rest of Europe if Greece were to leave the euro would be “somewhere between catastrophic and armageddon”, he said.

The Spanish prime minister, Mariano Rajoy, told parliament that his country faced trouble financing itself as borrowing costs shoot up to “astronomic” levels. The Irish finance minister, Michael Noonan, said Dublin’s plan to return to capital markets in late 2013 might not be achievable because of the uncertainty.

The first meeting between French president François Hollande and German chancellor Angela Merkel helped to calm nerves in the markets at one stage, with suggestions that Berlin might be amenable to initiatives to boost growth in Greece and the other austerity-stricken nations of the eurozone.

But the jittery mood was underlined by a fall in European shares and the single currency late in the day amid reports that the European Central Bank was cutting off its funding lifeline to Greek banks that had failed to amass enough capital to protect them from future losses.

The ECB later said it expected the Greek central bank to use part of the €130bn bailout from the EU and IMF to ensure that the country’s banks were safeguarded from collapse, and that they would receive additional help from Frankfurt only once this had happened. Already delayed by the political uncertainty in Greece, €18bn is now expected to be released to recapitalise the banks.

Sony Kapoor, of the Brussels-based Re-Define thinktank, said: “The high-stakes game of chicken between Greek and other EU politicians must end now. Those saying that a Greek exit from the eurozone will not be a big deal either don’t know what they are talking about, or have some ulterior motives. The social, political and economic damage to the EU from a Greek exit is potentially incalculable.”

At the G8 summit, which starts on Friday, Obama will press Merkel to lean more towards a growth package for Europe, instead of pressing so hard for the austerity measures that were rejected by Greek voters.

But foreign affairs analysts said that Obama’s leverage with the European leaders is minimal. Although the US has the economic muscle to help Europe out of its mess, the Obama administration has taken the strategic decision not to become involved directly.

Instead, Obama is to use the Camp David summit for some quiet diplomacy, hoping to sway Merkel to endorse some immediate actions to help growth.

King, speaking at the publication of the Bank of England’s quarterly inflation report, said growth in Britain was weaker and inflation higher than Threadneedle Street had expected three months ago. It would take until 2014 for output to return to where it was in 2008, when Britain’s deepest post-war recession began.

“What is so depressing about it is that this is a rerun of the debates in 2007/08 – these are not liquidity problems, they are solvency problems,” King said. “Imbalances between countries in the euro area have created creditors and debtors and at some point the credit losses will need to be recognised and absorbed and shared around,” he said.

“Until that is done, there will not be a resolution. That is why just kicking the can down the road is not an answer. The European Central Bank has performed heroically in trying to buy time but that time hasn’t been used to put in place fundamental underlying solutions.”

Conservative party: terms of engagement | Editorial

The question about what Conservatives are for if they cannot manage the economy successfully remains unresolved

Politics in an age of austerity, number 239 in a limitless series. Last night Conservative MPs turned the election for the executive of the backbench 1922 committee into a vehicle for their differences over what the party should be saying to voters. The result was inconclusive: the Cameron-baiting old guard were not trounced and nor was the 301 group of modernisers sent away with a bloody nose. The real question, about what Conservatives are for if they cannot manage the economy successfully remains unresolved. This matters to non-Conservatives too: the politics of extremes serves no one’s interests.

David Cameron knew there were irreconcilable backbenchers likely to cause trouble in the course of the parliament: early on he tried to capture the 1922 by allowing ministers to vote in its internal elections. Having, reluctantly, abandoned the changes, the slate put forward this time by the loyalist 301 group was widely seen as another attempt to subvert the committee’s independence. Excessive zeal in party management is never an attractive quality, but the Westminster bickering of an internal organisation is much less significant than the problem that it represents – constructing a viable platform amid the ruins of an economic policy on which the entire five-year programme of government had been predicated. For instead of going into the next election with a growing economy, more jobs and lower taxes, George Osborne has already conceded that there will probably be at least two more years of cuts to come. The past month in European politics makes plain how divisive the political consequences might be.

No Tory backbencher is (yet) publicly questioning the austerity strategy. Nor, the polls suggest, do a majority of voters. In fact, despite Tory MPs’ criticism of the budget shambles, voters still trust the coalition more than Labour on the economy. The question that really divides the party is whether in the face of austerity it returns to an enhanced core-vote strategy of shoring up the right flank from Ukip by focusing on the traditional crime, immigration and Europe agenda, or whether to keep faith, despite the vastly altered circumstances, in Cameron’s modernising programme and anchor the party to the centre-right. At stake is not just the slender majorities of the 40 group (the proliferation of Tory backbench groups is surely a reflection of the uncertainty about political direction), nor surviving the cull of seats as the number of MPs is cut, but the tone of British politics. The omens are mixed.

The best indication of current team Cameron thinking is in the parting shot of his California-bound blue-skies thinker, Steve Hilton. Mr Hilton’s frustration with the constraints of working at the centre of the Whitehall web has been well documented. In particular he despaired of the deregulation programme. Now the man who once mused on abolishing maternity benefit has left behind what is described as a well-developed plan for another swingeing round of welfare cuts with up to £25bn more taken from in-work benefits. It is a further sign of the shifting positions in the party that the welfare secretary Iain Duncan Smith has reportedly dismissed the idea as “absolute nonsense”. But – and this is something Labour must contend with – party strategists calculate welfare cuts to be popular, at least if accompanied by a reputation for economic competence. And although they would like to play down the old nasty party’s obsessions with Europe and immigration, and focus on jobs and the cost of living, there is no mistaking the pressure to appeal to an increasingly anxious electorate with a more divisive attack on the poor and workless. Strong and fair is one dubious slogan under which they would like to fight the next election. Meanwhile Mr Cameron’s increasingly noisy critics on the right worry that the prime minister has no stomach for fight at all. They see a Baldwinian inertia at the heart of government. That might yet mean that the loudest voice the voters hear is in the shrill tones of a populist right.

Huge risk of euro breakup if EU fails to act – David Cameron

Germany asking too much of other nations, says Treasury, as Darling describes existing fiscal pact as madness

David Cameron will issue his starkest warning yet on the plight of the euro on Thursday, saying unless urgent action is taken there will be a breakup, adding he will do whatever possible to keep Britain safe in perilous times.

Cameron’s stark message comes only a day after the chancellor, George Osborne, had said open speculation about the eurozone was itself damaging the European economy.

Cameron and Osborne now believe that with the failure of the Greeks to form a government, a direct warning has to be given to the eurozone leaders about the scale of the threat, and the need for urgent action.

Treasury sources say they have been arguing for the introduction of eurobonds for a year, as well as a looser monetary policy: “Without that, Germany is simply asking too much of the periphery countries who do not have the benefit of our independent monetary policy and flexible exchange rate.”

Cameron will underline the message at meetings with François Hollande, the new French president, and the German chancellor Angela Merkel at a G8 summit in Washington this weekend.

In a speech in Manchester before flying to the US, he will say: “Either Europe has a committed, stable, successful eurozone with an effective firewall, well capitalised and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the eurozone, or we are in uncharted territory which carries huge risks for everybody.

“But be in no doubt: whichever path is chosen, I am prepared to do whatever is necessary to protect this country and secure our economy and financial system.”

Alistair Darling, former chancellor and the man who helped stop a run on the British banks in 2008, said the crisis in Greece was now reminiscent of the run on Northern Rock, and that would look small beer in comparison with a Europe-wide crisis.

“The banks in too many parts of Europe were not cleared out in the way we and the Americans did in 2008 – so when you get all this turbulence it just adds to a lethal cocktail.”

Sounding exasperated and deeply worried about the unfolding crisis, Darling said: “The clear message that is being sent is surely now [that] they need to start thinking of a solution that is actually going to work, more than people expect.”

“The big risk is when the money comes out [and] the banks don’t actually physically have the stuff to hand over, you get cash machines going off, the doors closing and you do get blind panic.”

He described the fiscal pact signed by EU member states as madness, since “it locks countries on the edge into a downward spiral like the Treaty of Versailles at the end of the first world war with the result that their economies shrink and the debts go up. This is just daft .

“Whatever they do, they have got to do it quickly, and do more than people expect, or else the situation will get worse.The warning signs are there – that is what should strike fear into the hearts of every finance minister in Europe.”

Cameron in the domestic passage of his speech will insist he is not going to change course on deficit reduction despite the calls from business for some sort of stimulus.

Despite polls showing support for government economic policy receding, he will promise that he will take the right course and “not to dodge responsibility for dealing with a debt crisis but to lead our country through this to better times”.

Trying to give some sense of light at the end of the tunnel he will say: “We are well on the way in this journey. Since we took office two years ago, we have cut the last government’s deficit by more than a quarter.

Pointing to Wednesday’s news of rising employment he will say: “Now more than ever this is the time to stand firm. Let me be clear: we are moving in the right direction -– not rushing the task, but judging it carefully. And that is why we must resist dangerous voices calling on us to retreat.”

Promising not to return to the something for nothing economics that got Britain into its original mess he will say: “We cannot blow the budget on more spending and more debt. It would squander all the progress we’ve made in these last two, tough years. It would mean more austerity, for even longer. It would risk our future.

“It’s not an alternative policy, it’s a cop-out.”

But Ed Balls, the shadow chancellor, hammered home his argument that the domestic recession had not been caused by Europe, but by decisions taken by the chancellor in 2010.

“Rather than being a commentator idly speculating about the break-up of the eurozone – which is irresponsible – he ought to have been out there for the past year arguing with Germany for Germany to do the right thing to get the single currency to work.”

François Hollande meets Angela Merkel – full coverage

France’s newly appointed president arrives in Berlin for his first meeting with Germany’s chancellor

• Hollande meets Merkel, after lightning strike
• Last-ditch talks over Greek unity government collapse
• Fears Greece could run out of funds
• IMF: Greek euro exit would be ‘messy’
• Eurozone economy avoids recession, just

10.45pm: A report in the Financial Times by Quentin Peel in Berlin focuses on how Merkel and Hollande “joined forces” to urge Greece to reaffirm its commitment to membership of the eurozone.

It adds:

Both spelt out their concern that Greece should remain a full member of the common European currency, while promising to consider new measures to revive economic growth in the country.

But they also agreed that Athens must carry out the austerity programme it has agreed with the European Union and the International Monetary Fund.

10.33pm: There is plenty of reason to hope that François Hollande has some substance behind his stirring rhetoric about the need for growth, argues an editorial in Wednesday’s Guardian, which cites the dire state of the Italian and Spanish economies as well as the situation in Greece.

Yet his policies so far amount to slowing down the pace at which France reduces its (relatively small) budget deficit, and taxing wealth in order to create more jobs.

At an international level, he wants to adulterate the pure austerity his predecessor, Nicolas Sarkozy, agreed with Mrs Merkel. But this is merely to slow progress towards the cliff edge, when what is needed is a U-turn.

What the continent really needs to go for is an outright fiscal stimulus, of the kind even Mrs Merkel agreed to in 2009 (which gave German carmakers such a shot in the arm).

10.18pm: Many commentators seem have decided that this first meeting between Merkel and Hollande was a frosty one.

While both leaders presented a united front in relation to their desire for Greece to remain the Euro, Hollande made a point of emphasising his desire for the eurozone to change direction and embrace a strategy based on growth.

He added that he wanted Europe to pool its ideas on growth measures by the end of June.

From the German side, that Merkel underlined that Greece had to stick to its side of the deal regarding its debt management, reports Kate Connolly:

“We think promises made have to be kept,” Merkel said, following brief talks with Hollande who flew to Berlin just hours after his inauguration.

“We have said whatever we can do regarding structure and growth we’ll do,” she added.

Hollande said: “It’s my wish that Greece stays in the Eurozone… but we have to make it possible for Greece to find solutions to its problems.”

Merkel said she wanted to stress the message particularly ahead of the new Greek poll in June.

“We’ll make clear that we have the expectation or wish that Greece stays in the Euro,” she said, adding that she would be happy to hear of “any additional measures for growth either coming from Greece or that we can suggest to them if they want that.”

Touching on the topic of encouraging growth which very much shaped his election campaign, Hollande added: “We need to be able to say to Greece Europe is ready to support further growth measures so that growth can return to Greece.”

9.48pm: François Hollande’s plane was hit by lightning as he took off from France earlier but there was no spark between him and the German chancellor when they eventually met, reports Kate Connolly.

In a sketch of the “first date” between the two leaders today in Berlin, she describes how it was an awkward one despite functional smiles and handshakes.

At one point, Merkel had to correct Hollande when he tried to cross her path as they inspected German troops.

But Merkel is nothing if not a pragmatist, and so the two sat down for a working supper which she knew was going to set the tone for all their future negotiations.

The menu was diplomatic: rind de bouillon with vegetables and pancake stripes, asparagus with veal schnitzel, followed by strawberries and ice-cream and cheese and grapes, along with a range of German wines.

Berlin officials had worked feverishly behind the scenes to create the best possible impression of harmony before the visit, and tried in vain to downplay its significance.

“This won’t be a decision-making summit, rather an initial, get to know you meeting,” a German government spokesman, Steffen Seibert, said before the occasion.

But it was clearly far more than that, with two politicians who had never met before coming together to see not only if they could get on, but whether they could work together to solve one of the most seemingly intractable problems Europe has faced since the second world war.

9.21pm: In terms of François Hollande’s economic vision, some of the real meat was set out earlier today in Paris after he took power in a deliberately low-key ceremony.

Angelique Chrisafis, the Guardian’s Paris correspondent, has filed a report on how the new French president promised “a new path” for Europe, insisting growth measures to kick-start economies would go hand in hand with the reduction of public debt:

He vowed his five-year term would be fair and just. He said he would unite France and bring the divided country much needed calm and reconciliation.

In a series of digs at [Nicolas] Sarkozy, who had been dubbed the president of bling bling, Hollande, in his speech in Paris, promised “scrupulous sobriety of behaviour”.

He saluted the contributions of previous French presidents, including Jacques Chirac’s attachment to the “values of the republic”, but stopped at citing any Sarkozy achievements, saying simply he wished him well in his new life.

Hollande acknowledged the hurdles he faced: “A massive debt, weak growth, high unemployment, degraded competitiveness and a Europe that is struggling to come out of crisis.”

As if the crisis-hit eurozone needed another metaphor for doom, the new president’s first day in office was accompanied by thunder and lightning storms of epic proportions.

Angelique also filed this profile of Hollande’s new prime minister, Jean-Marc Ayrault, a former German teacher who has been working behind the scenes to smooth Paris’s relations with Berlin.

9.12pm: A couple of key quotes in full now from that first joint Merkel-Hollande press conference.

Hollande, who wants to temper Berlin-led austerity policies with pro-growth measures said he and Merkel both wanted Greece to remain in the euro currency zone and hoped voters there would show they did too in a June 17 election.

“I hope that we can say to the Greeks that Europe is ready to add measures to help growth and support economic activity so that there is a return to growth in Greece,” Hollande said.

“On growth, the method that we agreed is putting all ideas and all proposals on the table and seeing what legal means exist to put them into effect.”

8.56pm: It wasn’t exactly a cordial press conference and seemed a little awkward at times even though Merkel and Hollande tried their best to show they will get on, according to Mathieu von Rohr, Paris bureau chief for Der Spiegal.

Again though, as was so often the case during her political relationship with Hollande’s predecessor, Merkel’s body language is under close scutiny:

Merkel didn’t say anything when Hollande used the dirty word “renegotiation” in front of her. But showed a strange smile/grimace afterwards

— Mathieu von Rohr (@mathieuvonrohr) May 15, 2012

8.50pm: Faisal Islam, economics editor at Channel 4 News, has been tweeting what he took from the press conference:

I got a sense that Hollande and Merkel might give a little back to Greece. No strict reference to “full implementation of memo”.

— Faisal Islam (@faisalislam) May 15, 2012

Boils down to this: will Merkel/ Hollande give some ground to Greece over the austerity conditionality ahead of June bailout payment? #HoMer

— Faisal Islam (@faisalislam) May 15, 2012

8.45pm: And that’s it for now. A handshake between the two leaders signals the end of the first joint press conference between the two leaders.

It was a million miles away from anything in the way of political fire-works but, equally, there seemed to have been no attempt to paper over differences.

Hollande emphasised his belief in the need to introduce an impetus for growth within the eurozone while both leaders were completely open about the fact that they disagreed.

8.40pm: A question to the two leaders now on the Greek situation, and whether the new elections will be helpful.

Merkel responds first to another question about what language they used during the discussions this evening.

Everything was talked about in their “native tongues”, she says.

As for Greece, she says that the wishes of the people of Greece have to be respected, and the decision to hold elections.

Hollande says he will respect whatever happens with the Greek vote. He also “appreciates” the suffering of the Greek people

As for the conversation earlier with Merkel, he says that they used “the language of intelligence, the will to find solutions”.

8.37pm: Hollande is once again emphasising the need for growth creation.

Tomorrow, he says that the new French government will seek advice on how to execute the budget of 2012.

8.34pm: The euro is not just a monetary project but “a political project” too, says Merkel.

European have benefitted from this and will continue to do so, she says, adding that those on the continent have the same values: freedom of speech, liberty and democracy.

“This is also expressed via the single european currency,” she says.

8.32pm: Again to the thorny, but ultimately central, question of the Eurozone’s fiscal treaty.

Hollande is largely non-committal in answer to a question about what exactly he will be pressing for but repeats that he has told the French people that he wants to renegotiate it.

8.27pm: Hollande says that he wants efforts towards encouraging growth in the Eurozone to be tangible, rather than just words.

A range of options should be on the table, including eurobonds, adds the French President, referencing an instrument which has long been rejected by Angela Merkel as a possible way of bringing the eurozone crisis under control.

8.24pm: Hollande is talking now about the importance of a “balance” in the relationshup between France and Germany.

The two talked about Greece, he adds. Like his Germany counterpart, he says that he wants Greece to remain in the eurozone.

“We have to allow the Greeks to find solutions,” says Hollande, adding that he hopes the Greeks will express in the forthcoming June 17 elections their attachment to the eurozone.

8.21pm: We wish to have Greece within the Euro and we know that the majority of the Greek population agree with us, says Merkel.

The two leaders talked about what they could to to help greece in terms of “structure”, adds the German chanellor (according to the BBC translator).

8.17pm: The Merkel-Hollande news conference is underway now in Berlin.

Merkel starts by suggesting that the lightning strike on his plane is a good omen for their future relationship.

“We have quite an intensive agenda in terms of European questions,” she adds, in what may be the understatement of the week.

8.03pm: While most of the media spotlight is currently on Berlin, it was Greece that was once again centre-stage earlier today.

In case you missed the news, the country is heading back to the polls again after a final round of talks this morning broke up without a deal following the fractured results of its most recent general election.

Amid fears the new election will do the very thing it is supposed to stop, hasten the country’s economic collapse and exit from the eurozone, the Guardian’s Helena Smith has filed a report from Athens:

After a week of political high drama after inconclusive elections, feuding party chiefs acknowledged their inability to form a unity government on Tuesday, with several blaming Alexis Tsipras, whose Left Coalition party has taken Greece by storm.

“Unfortunately the country is being led again to elections … under very bad conditions,” said the socialist Pasok leader, Evangelos Venizelos, after the breakdown of the last-ditch negotiations at Athens’ presidential palace. “For God’s sake let’s move towards something better, not something worse.”

Across Europe there is no illusion that the poll, expected to take place on 10 or 17 June, is a referendum on whether the near insolvent country – kept afloat by EU and IMF rescue loans – stays in the eurozone.

Within hours of the election being announced, the German finance minister, Wolfgang Schäuble, summed up the predicament Greece now faced. “If Greece – and this is the will of the great majority – wants to stay in the euro, then they have to accept the conditions,” he told reporters at a meeting of European finance ministers in Brussels.

“Otherwise, it isn’t possible. No responsible candidate can hide that from the electorate.”

7.57pm: Back to the issue of the Merkel-Hollande body language. Here’s the take of Kate Connolly, Berlin-based foreign correspondent for the Guardian and Observer:

#Merllande cordial but awkward. #Merkel had to steer him back onto red carpet when he stepped across her path. Sign of things to come?

— Kate Connolly (@connollyberlin) May 15, 2012

7.52pm: While we’re waiting for the press conference to get underway, Reuters has filed an interesting profile of France’s new prime minister, a German speaker whose familiarity with the corridors of power in Berlin may prove invaluable as Paris seeks to temper Germany’s austerity drive in Europe.

The stately, silver-haired Jean-Marc Ayrault, a former German teacher and long-time ally of president-elect Francois Hollande – has made pragmatism his hallmark in holding together the Socialists’ fractious parliamentary group as its floor leader since 1997.

With his understanding of Germany’s language and culture, the conciliatory Ayrault could be a bridge-builder with Berlin after a bruising presidential election race in France that focused on Hollande’s demands to renegotiate a German-inspired budget discipline pact for Europe.

At home, his new government will also face the difficult task of selling inevitable deficit-cutting measures to a public weary of unemployment running at nearly 10 percent.

“This is the outcome of a long fight alongside Francois Hollande for the 15 years we have known each other,” Ayrault said, adding that despite his reputation for shyness he was not afraid to admit he was moved by the appointment.

“I am aware of the difficulty of the task, the mission which awaits me.”

7.34pm: The Merkel-Hollande talks come as an unexpectedly strong recent economic performance by Germany helped compensate for weaker output in Greece, Italy and Spain.

Figures released in European capitals today underlined the two-speed nature of the 17-nation single currency area, even though the 0.5% expansion in Europe’s biggest economy helped to compensate for weaker output in Greece, Italy and Spain.

But analysts warned that any respite could be short-lived, with the latest flare-up in Europe’s long-running sovereign debt crisis likely to damage growth prospects for the rest of the year, reports Larry Elliott, the Guardian’s economics editor:

Figures released in European capitals on Tuesday showed that Germany – which accounts for 27% of eurozone GDP – bounced back from a 0.2% drop in output in late 2011, while France followed growth of just 0.1% with a quarter of stagnation in early 2012. In the year to the end of March 2012, Germany grew by 1.2% and France by 0.3%.

Other countries to post quarterly growth included Finland (1.3%), Austria (0.2%), Belgium (0.3%) and Slovakia (0.8%).

But tough austerity measures took their toll on Italy, where the 0.8% quarterly drop in output was the third in a row; Spain, which saw activity decline by 0.3% for a second quarter; and Greece, which reported that the economy was 6.2% smaller at the end of the first quarter of 2012 than a year earlier.

The Netherlands also posted a third consecutive quarter of negative growth, with activity down by 0.2% in the first quarter of 2012.

Overall, the eurozone economies have shown no growth in the past year, while the 27-nation European Union has seen output increase by just 0.1%.

7.26pm: The Merkel-Hollande press conference is due to get underway in 30 minutes time.

7.17pm: Watchers of this evening’s meeting have had their eyes peeled for the first indications of what the body language will be like between the two leaders.

Sarkozy and Merkel eventually developed a friendlier working relationship as they worked to resolve the continent’s debt crisis, but the relationship between the two often looked awkward to say

Some slightly worrying signs emerged from the meeting earlier in Berlin however as Mathieu von Rohr, Paris bureau chief for Der Spiegel, tweeted:

Merkel had to push Hollande around on the red carpet because he stood on the wrong side.

— Mathieu von Rohr (@mathieuvonrohr) May 15, 2012

7.07pm: Hollande has been received by Merkel with an honour guard ahead of talks.

The two leaders are scheduled to hold a joint news conference following the meeting and then have dinner together.

6.59pm: The two leaders are expected to hold a press conference this evening following talks which, Hollande has said, is about getting to know each other.

But there will be much more going on besides that, as the Guardian’s Europe Editor, Ian Traynor, has explained:

The pressing issue of Greece, for example, as weeks of a power vacuum fuel German exasperation and add to the sense that enough is enough – time for Greece to end its ill-advised sojourn in the single currency.

The Germans and the Greeks have been the opposing poles in the euro crisis for more than two years. Nicolas Sarkozy hitched himself to Merkel and followed the German line.

No one knows yet where Hollande stands, but the signs are he will favour flexibility over German stickling for the rules.

On the broader national and European issues of recession, debt, and fiscal rigour, Hollande has been outspoken and blunt, campaigning as the anti-Sarkozy challenger to Germany’s austerity prescriptions. Asked by French TV if he would arrive in Berlin bearing gifts, he replied: “The gift of growth, jobs, and economic activity.”

Merkel, by contrast, made clear she saw no reason to shift her position on the European debt dilemmas just because of a weekend election rout for her Christian Democrats.

Hollande goes to Berlin on the first day of his presidency buoyed by a fresh and powerful mandate from the voters of France. Merkel, in office seven years and squaring up for a third term next year, looks diminished by the calamity on Sunday in the big state of North-Rhine Westphalia where her CDU slumped by 8 points to record its worst postwar performance there.

6.47pm: It’s the most eagerly awaited dinner date on the international stage for some time, where the debate over growth versus austerity is expected to take centre-stage.

Hours after taking over as France’s president, François Hollande has arrived in Berlin for talks on Europe’s debt crisis with the German Chancellor, Angela Merkel.

In what many are hoping is not an ill-omen, the Falcon 7X aircraft which he boarded earlier was struck by lightning and had to return to the Villacoublay air base outside Paris as a precaution.

Hollande and his entourage were transferred to another aircraft, a Falcon 900, and took off shortly thereafter.

As the future of the Eurozone hangs in the balance, we’re going to bring you full coverage of the first top level meeting between the two current leaders of the Eurozone’s Franco-German engine.

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François Hollande meets Angela Merkel for summit in Berlin

French president’s plane may have been hit by lightning, but there was no spark between him and the German chancellor

It was a dramatic arrival, but arrive François Hollande did. Not even a lightning strike on his plane was enough to stop France’s new president from keeping his date with destiny. As he stepped out of his Mercedes to be greeted by Angela Merkel for the first time on Tuesday evening, “Merkollande” or “Merde” – composite names for the two politicians seen to have Europe’s fate in their hands – was born.

Despite a show of functional smiles and handshakes, their first date began awkwardly. Merkel had to correct Hollande when he tried to cross her path as they inspected German troops. She put her hands on his arm and efficiently shifted him back on to the red carpet. Later they giggled about it, but there was no sign of the “open-armed embrace” that had been promised. Maybe that will come later, although Merkel never did warm to l’art de la bise, the art of kissing introduced to her by Nicolas Sarkozy which helped to earn them the joint moniker “Merkozy”.

The couple could hardly have started off their working relationship on a worse footing. Months before they met, she snubbed Hollande, refusing to receive him during his election campaign, while offering to throw her weight behind that of his rival. Even more crucially, Hollande had based much of his election campaign on rubbishing Merkel’s management of Europe’s crisis, on which she has more or less gambled her political future and from which she insists she will not back down.

But Merkel is nothing if not a pragmatist, and so the two sat down for a working supper which she knew was going to set the tone for all their future negotiations. The menu was diplomatic: rind de bouillon with vegetables and pancake stripes, asparagus with veal schnitzel, followed by strawberries and ice-cream and cheese and grapes, along with a range of German wines.

Berlin officials had worked feverishly behind the scenes to create the best possible impression of harmony before the visit, and tried in vain to downplay its significance.

“This won’t be a decision-making summit, rather an initial, get to know you meeting,” a German government spokesman, Steffen Seibert, said before the occasion.

But it was clearly far more than that, with two politicians who had never met before coming together to see not only if they could get on, but whether they could work together to solve one of the most seemingly intractable problems Europe has faced since the second world war.

The psychological advantage had appeared to be Hollande’s. He came to Berlin buoyed up by a fresh new mandate to steer Europe away from dogged austerity and towards a greater emphasis on growth. Merkel, in contrast, is not only finding herself increasingly isolated in Europe, but is reeling from a sensational defeat for her conservatives at regional election which may portend the outcome of next year’s federal election. But after seven years in office, her personal popularity ratings could hardly be higher, largely thanks to her management of the Europe crisis. So she was ready to be squared up to.

How much Sarkozy had briefed his successor earlier in the day during their handover at the Élysée Palace about the “strict German”, as she is sometimes referred to in Paris, or “Onshela”, as Sarkozy came to call her, remains a secret between the two. But perhaps he furnished Hollande with useful tips about her fondness for French cheese and wine, which he used to regularly send to the chancellery. Perhaps he offered a joke. Those close to Merkel say the key was that Sarkozy was able to make her laugh. That will be a challenge for Hollande.

But Hollande and Merkel are also more similar than their contacts over the past few months might indicate. Both were grossly underestimated by the bigwigs in their own parties, both are sober, balanced, pragmatic and unpretentious, and champions of irony, which is always good for taking the sting out of an argument. Not since the cold war has personality played such an important role in European politics.

But unlike Merkozy, two leaders who were brought together by a crisis, Merkel and Hollande don’t have the luxury of time. “There is no warming-up phase for them,” said the Süddeutsche Zeitung. “The crisis is already upon them.”

Hollande, on the other hand, has to stand true to his convictions and “cannot be weak-kneed”, said French political scientist Pascale Parrineau, if he wants to steer Merkel in a new direction.

Even if they didn’t outwardly show it at Tuesday night’s brief encounter, the Socialist and the Christian Democrat have the expectations of millions of Europeans on their shoulders, and know full well that they will go down in history either as the protectors or the destroyers of the euro, and with it European integration.

That is a sobering thought as growing numbers of European citizens across the continent are showing a new readiness to go to the barricades to vent their anger.

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Letters: Should Greece stay or should it go?

When its policies are under threat, Europe’s elite always try to frighten people into compliance, but it’s impossible to say that the consequences for Britain if the euro falls apart are worse than those arising from a long struggle to make the unworkable work (We agree about Europe, 14 May). The latter will demand British contributions to sustain a project we didn’t join and advised against, and if the uncompetitive Mediterranean countries can’t devalue they’ll suffer long and hard deflation. So will Germany, because its Euro markets will decline, and a failing European economy will drag the world down with it.

Breaking out to a more competitive exchange rate will be tough but creates the opportunity for growth, and once some or all of the Club Med states go the euro will rise, making Germany less competitive and stopping its excessive surpluses. That offers a much better prospect of growth and revival than any big EU infrastructure projects, which will take years, or an expanded European investment bank pouring our money down European black holes.

As for structural reforms, they are much easier when economies grow than in prolonged deflation, which despairing electorates won’t accept. Euro guff won’t bring growth, and it’s silly to say we’ll be locked out. If the EU is heading obstinately to self-inflicted disaster, locked out is the best place to be.
Austin Mitchell MP
Labour, Great Grimsby

• Ed Balls and Peter Mandelson are right, the UK should take a central role in ensuring a future of sustainable growth for the EU, with the funding of infrastructure being centre-stage. The crucial question is what kind of infrastructure. To make Europe’s future a “sustainable” one in an environmental sense will mean rejecting the usual old vanity projects of motorways, airports and high-speed trains. A really job-generating but green infrastructure programme would make all buildings energy-efficient, massively reduce use of raw materials through reuse and recycling, and improve regional transport networks. All this could generate jobs and business opportunities where people live, rejuvenate local economies and so eventually reduce public debt. If François Hollande and the Greeks’ Syriza alliance also call for a shift from austerity to greener prosperity, this could at last result in the replacement of the sado-monetarist lunatics in charge of the EU asylum.
Colin Hines
Convener, Green New Deal Group

• £130bn to rescue Greece (Europe’s elite braced for Greece exit, 15 May)? Scandalous! Yet this country alone has spent 10 times that amount to save the private banks, with no questions asked, and very little of that money is likely to be recovered. Have the banks had austerity measures imposed on them, or any measures at all? Am I missing something, or has the world gone completely barmy?
Gerard Ledger
Oxford

• Keynes understood that if you have a currency union you need a mechanism to sort out imbalances, transferring resources from creditors to debtors, otherwise the strain on debtor nations of being part of the union will become intolerable. That was the point of his scheme for an International Clearing Union, launched in 1943 and intended to be a global bank, working on the overdraft principle, so that all those nation-states needing dollars for reconstruction after the war would be able to get their hands on them. And they would run down the overdrafts by selling what they had made to the US and to each other – in other words, via growth. There is no other way.

In the end the ICU never took off – but the US provided aid after 1945 via the UN, loans to the UK and France, Marshall Aid, the Military Assistance Programme, the IMF, funds for development and private foreign investment by multinationals. It took the cold war to galvanise the US to play the part of generous creditor in the global economy, underpinning a generation of unprecedented expansion. On the other hand, the German government and its friends in Brussels and Frankfurt have by their addiction to rules (ordoliberalism gone mad) turned the euro into an economic doomsday machine, and short of a U-turn on their part the only escape is for debtors to abandon it.
Professor Scott Newton
Cardiff University

• Ed Balls and Peter Mandelson make some sound points such as the European Investment Bank funding infrastructure investments to recover growth, but are wrong in claiming that “at the heart of Europe’s problems is the fact that the eurozone does not have the institutions or political machinery to project confidence”.

It does. The European Central Bank is obliged to support the general economic policies of the union, as defined by heads of state and government. It must do so without prejudice to the internal and external stability of the currency, but defending the internal stability of the eurozone is such a policy. It could be aided by shifting a share of national debt to the EU, not least since while member states are deep in debt after salvaging banks, the EU itself had none until May 2010 when the ECB started to buy out public and private sector debt.

There are constraints on EIB co-finance because of the crisis, but these can be offset by Eurobonds issued by the European Investment Fund, which is part of the EIB Group. The Fund was designed to issue the EU bonds proposed in 1993 by Delors. It could do so now without a treaty revision, as it recently confirmed to the Economic and Social Committee of the EU. These would attract surpluses from the central banks of the emerging economies and sovereign wealth funds.

Nor do criteria for EU recovery investments need to be agreed. They have been so since 1997, not only for transport networks but also for investments in health, education, urban renewal and green technologies. These already are project-financed by the EIB rather than needing fiscal transfers between member states. Through Eurobonds the EIF could fulfil one of its original design aims of financing a public venture capital fund for small and medium firms.

Further, none of the major eurozone member states – nor Greece, Portugal or Ireland – count EIB borrowing against national debt. Nor need EIF Eurobonds do so. Converting a share of national debt to the EU and issuing Eurobonds does not need unanimity. Both could be by enhanced co-operation, which needs the agreement of only nine or more member states. If they wish, Germany, Austria, Finland or other member states could keep their own bonds but the rest of Europe could undertake a New Deal-style social investment-led recovery.
Stuart Holland
University of Coimbra

• The euro is a great concept but was badly conceived, without a central bank or political, fiscal and economic harmonisation. But the greatest problem today is how to manage state finances when billions disappear into the world’s tax havens thanks to the absence of any monetary controls and politicians granting their wealthy friends and multinationals all kinds of tax advantages and favours that have diluted tax revenues to the point where there is not enough in the kitty to maintain public services.

Even Paul Krugman has admitted that a return to temporary monetary controls could be an answer. With regard to Greece I would say that, in exchange for handing over more money, all Greek funds abroad in Switzerland or elsewhere must be returned. Then the same conditions should apply to the rest of Europe’s member states. According to the Tax Justice Network, over a trillion dollars lies in offshore banks and companies in tax havens. Recover this money and governments could not only reduce their debts but pave the way for a lowering of taxes across the board to encourage investment and growth, and increase spending power for the majority.
Peter Fieldman
Madrid