Europe is getting interesting again

Not my words, but those of a former senior US official quoted by one of the participants at last weekend's annual meeting of the Council for the United States and Italy . In the event, neither the US nor Italy got much of a look-in during two days of discussion that focused mainly on the fix the European Union finds itself in as a result of the financial crises on its southern fringe – and on the economic and political ramifications that they might have. These sorts of get-togethers are never easy to summarise, partly because the discussions are held on an unattributable, " Chatham House rules " basis, and partly because no attempt is made to reach conclusions. But, on this occasion, a number of conclusions did emerge – or at least went uncontested – and it might be worth setting them down for wider discussion. The first was that no one should underestimate just how much of a fix Europe is in. The fall in the euro had nothing to do with irresponsible speculation by hedge funds, but was soundly rooted in the eurozone's foreseeably lower capacity for economic growth and a justifiable fear that, in the medium term, its banks were still perilously exposed to Greek (and maybe to an even greater extent, Spanish) debt. Yet the second conclusion was that the real problem now was represented by Germany. Greece, Spain, Portugal and Italy had all approved belt-tightening measures that, if properly implemented (a big if, admittedly), would start to solve the debt problem. But that still left the growth problem. And, as noted by Richard Burt, a former assistant secretary of state and US ambassador to Germany, in an article in the latest edition of The American Interest , the austerity measures will actually exacerbate it. German exports have traditionally been the motor of European growth. But, if the rest of Europe (and that includes Britain), all tighten their belts, thereby suppressing demand, who is going to buy German goods? The alternative is for the Germans to buy more of their own goods, which was the solution to the problem put forward by the French finance minister, Christine Lagarde. The third area of agreement, however, was that there was not a cat in hell's chance of that happening. The Germans were not in a mood to help the rest of Europe, and least of all by going on a spending binge that could widen their own budget deficit. Germany was special. Where else, one participant asked, would a delegation of employers go to the government to protest at a plan to cut taxes (on the grounds that it could destabilise Germany's public finances and thus, ultimately, the euro)? Currency stability was as viscerally important to Germans as employment was to Americans (and for historical reasons which, in both cases, dated from the period between the two world wars). Right now, moreover, German attitudes were shot through with hefty doses of (less than entirely justified) resentment over what had happened in Greece. The country, as has been highlighted by recent events, was in a fragile state and unable to deliver on Europe in the way that it has been doing since at least the 1980s. Indeed, large sections of society were turning away, not just from the euro, but from the entire European project. One way out, it was suggested, might be for Germans to stimulate growth by the sort of reforms that economic liberals have been urging on them for years: more flexible shop opening hours; greater labour market flexibility, and so on. Here, it was thought, there might even be scope for co-operation between Angela Merkel's coalition and David Cameron's (if, that is, Merkel's survives). But the overall feeling was that – to use the title of Richard Burt's paper – Europe (and not just the euro or the EU) was "drifting and at risk". A pity then that a fourth area of agreement was that Europe's problems scarcely figured on Washington's radar. It might still be the United States' biggest trading partner but, exasperated with BP, harassed by the Tea Party movement and with a long list of other foreign policy issues to focus on, the Obama administration was just not seeing how worryingly "interesting" Europe had become.