Financial market reaction to the outcome of last week's summit of eurozone leaders, coupled with weak growth signs, suggest that Europe's sovereign debt crisis will rumble on. Is the euro in decline, or were steps made to build firmer foundations for the single currency?
From a London perspective, the single currency is a quixotic economic experiment doomed to eventual failure. Seen from Berlin, capital of the country whose actions are critical to the euro's survival, the view is different hence the summit re-commitment ‘to do whatever is needed’ to sustain the single currency.
Germany sees itself as a medium sized nation state in a world containing emerging giants such as China and India. Troublesome Russia lies nearby and the United States has become a less certain partner. So Berlin still believes it will be able to defend its vital interests if the single currency succeeds and Europe becomes more deeply integrated, politically and economically.
Since the 2007 financial crisis, the European Union and the eurozone have made significant strides towards deeper integration. But governments, not least German Chancellor Angela Merkel's, are having to move cautiously in bailing out Greece, Ireland and Portugal and in building a ‘firewall’ to try to prevent the debt conflagration from spreading to Spain and Italy.
Voters' doubts about the European 'project' are now well rooted in many eurozone countries, including Finland, Holland and France. Such populist and nationalist leanings are less evident in Germany which is taking the opportunity to advance the economic integration of the continent.
Seeking to separate the Greek disaster from the wider sovereign debt problem, eurozone leaders at the summit agreed on a second Euro 109 billion Greek bail-out package.
Much more significantly for the longer-term, eurozone leaders reached agreement in principle on widening the role of the official bail-out institution the European Financial Stability Facility (EFSF), and of its successor from 2013, the European Stability Mechanism (ESM).
The leaders' failure to beef up immediately the EFSF/ESM's financial resources left the proposals looking a little lame. However, an explicit goal was agreed to create an institution that will be able to intervene pre-emptively, but conditionally, in eurozone countries. This would be done by, for example, supporting bond markets and recapitalising banks even if they are not in an official rescue programme.
The long-term EFSF/ESM agenda, backed by Germany's commitment to the euro, is a tipping point for European integration. The EFSF/ESM is on the path to becoming a European version of the International Monetary Fund and a cornerstone of a deeper political union.