Adrian Hamilton: The real euro crisis is yet to explode

International Studies

The dance of despair – the dance of death, some would say – between the financial markets and the euro leaders goes on. The markets demand firm action from governments, the euro leaders try calming words, and then it's a step backwards as the markets declare it is not enough.

So it has been with the crisis summit between Chancellor Merkel of Germany and President Sarkozy of France on Tuesday. The markets wanted a dramatic declaration of action, preferably the launch of the eurobond. Angela Merkel retorted, as she has always responded, that she has no intention of doing that, however much the French may have wanted it.

Nobody should be surprised by this. It's all very well, and quite justified, to decry the lack of leadership in Europe, to point to the differences between France and Germany and to throw one's hands up in hopelessness and declare, as many do, it all over for the euro.

Perhaps it is – although it will be an awful mess if it happens – but at the moment the markets are asking something impossible from democratic governments. For the sake of saving the euro, the Germans were prepared – reluctantly – to bail out the Greeks and even to try to keep the financial storm from breaching the walls of Portugal and Ireland. But when it comes to Italy and Spain, a bailout takes on a different character altogether.

You can accuse Merkel, facing an election next year, of cowardice before the face of the voter. But even if she had more courage, bailing out these countries may be beyond the means of even Germany, and certainly beyond the tolerance of a German electorate which is experiencing an economic slowdown itself.

For France, of course, the options are simpler, so long as they can get the Germans to pay for them. But without them, France is not able to bail out anyone. Indeed the exposure of its banks to Italy and Spain is such that it stands to fall with them should it try.

And the markets themselves, it should be said, are being contradictory in their demands. They have no more idea than politicians of where the situation is headed, so they are demanding that governments take the lead.

Yet they are right on one thing. The overhang of debt in the eurozone is now so huge that it cannot be dealt with by budget cuts and higher interest rates. At some point soon Italy and Spain, and with them Ireland and Portugal, will simply be unable to carry over their debt, and the European Central Bank will have exhausted its funds.

The likely timing is September, as the traders and financiers return from holiday. The likely occasion, and consequence, is another run on the banks (and they include the British institutions) exposed to sovereign debt.

We will, in other words, be in phase two of the financial crisis that nearly brought the world economy down in 2007-8. It's not impossible to deal with. Just as then, coordinated international action and state intervention can stop the rot. What it can't do now is to restore growth.

That is bad enough for the bankers seeking to recoup their loans through growth. But think how much worse it is for politicians used to promising good times around the corner. One has to sympathise with Angela Merkel and her fellow democratic premiers. Why talk of quick fixes such as eurobonds when only a full-blown crisis will convince their electorates of just how severe their predicament is.

Finally Indians stand up to corruption

The British are clearly not the only people to mismanage riots and protests. The Indian government's decision to arrest the 74-year-old anti-corruption activist Anna Hazare and more than 1,200 of his supporters is a monumental mis-step by a Prime Minister, Manmohan Sing, who has already lost much of his credibility through the succession of scandals that have hit the country over the past two years.

It's never wise to write off the sheer inertia and political sclerosis of the sub-continent, of course, but this could be a decisive step in the growing movement to reform the country and its pervasive corruption. Leading businessmen such as the head of Tata are now speaking openly against it, while around the country both the poor and the new middle classes are starting to reject this way of doing business, just as they are in the Arab world and even China and South-East Asia.

Some may feel that this crisis is a bit unfair on the Prime Minister, who has never been personally associated with malpractice. But the opposition has found a cause to unite on, and the popular groundswell is now evident. Not before time.

Pace of change in Tunisia carries risks

Tunisia has now followed Egypt in fairly brutally suppressing protests at the slow pace of change. One sympathises with the protesters. Elections are not due until October and, in the meantime, the power structure remains much as it was before the revolution. But at least, unlike in Syria, revolution has been peaceful and security maintained.

The problem with earlier elections would have been that few parties were organised to contest them and those that were – such as the Islamic groupings – were not necessarily the most democratically representative. The problem of delaying the vote is that people, as we have seen, grow impatient.

Western Europe needs Tunisia to work out well, although it cannot be said that we are doing much to help them, particularly over refugees.

a.hamilton@independent.co.uk