Who will dictate Europe's future?
WHICH country holds the key to the euro's fate? Which of the 17 members will turn out to be the "pivot state" the country around which the future of the eurozone will turn? I spent most of last weekend thinking about the future of Europe with economists, politicians and senior policy makers at a two-day seminar organised by Centre for European Reform. (I know, I get all the fun.)
One way or another, this question kept on coming up - maybe because it's a useful way to think about the different paths which the euro could take from here.
Two years ago, you might have said Greece was the pivot state. Policy makers were convinced that a Greek exit from the euro would be the end of the whole thing. The effort to save the euro boiled down to a massive effort to keep Greece in. Not any more. I don't speak to many City folk or European policy makers who are confident that Greece can stay in the single currency. But I would say a majority are fairly convinced that the euro will survive - even if some of them wish it were not so.
Ask the same question now, you might get "Spain" as the answer. The new confidence around the euro stems largely from the ECB's commitment to Outright Monetary Transactions (OMT) - to acting as a backstop for countries in the markets by buying their government debt. Spain is the country that programme was designed to help. So how and when it gets that help might well determine how this stage of the rescue strategy works out.
Longer term, though, you have to wonder whether we will continue to be quite so focussed on Spain. After all, it's not Spain that is responsible for 57% of the sovereign debt of the troubled eurozone economies - it's Italy. And come the spring, Italy will be looking for a new prime minister.
In their punchy new book, Democrisis, David Roche and Bob McKee say Italy is the "circuit-breaker" that could make a lot of the crisis go away: "Italy represents more than half of every form of measurable economic contagion of the eurozone sovereign debt crisis... If the markets believe Italy is 'saveable', a virtuous outcome is possible and contagion will go into reverse." That makes Italy sound very much like the pivot state: the country whose future could dictate everyone else's. The fact that an Italian now runs the European Central Bank is the icing on the cake.
You might ask where Germany fits in all this. After all, we're used to thinking Germany holds the euro's future in its hands. But the notion of a pivot state goes beyond sheer power, or economic heft - the pivot state isn't necessarily or even usually the biggest country. Rather, it's the fulcrum that helps to tip history one direction, or another. There is one large nation that I hear investors and policy makers talk about more and more as the pivotal state of Europe - but it's not Germany. It's France.
It's still possible that events in Spain or Italy will determine whether the euro survives. But if it does last, France is most likely to determine the kind of eurozone it is, and whether Germany and its people feel happy to play along. Almost without anyone noticing, Fra ce has become an even more state-dominated economy than it was 30 years ago, with government spending of nearly 60% of GDP and a tendency to raise taxes first, and talk about spending cuts a lot later.
Many in France - including on the right - think that combination is sustain- able, thanks to French companies' world-beating manufacturers. In some key sectors, they are truly second to none. France also has much better demographics, looking ahead, than either Germany or Italy.
But Chancellor Merkel does not take such a sanguine view. And nor do many international investors.
That is why market watchers and not a few German officials were paying very close attention to President Hollande's big press conference last Tuesday. They want to know whether he can combine concrete economic reform with his call for less austerity. If he does not, then Germany knows that the harsh budget arithmetic in the new Stability and Growth Pact will not add up even for France - let alone the likes of Spain. For all these reasons, the socialist president of France may well be the European politician who has the most say in dictating the future of the euro - especially after next year's German election. To be clear, I think the euro will probably survive. But history may judge that it was President Hollande who decided, in 2013, whether Europe was going to have a squidgy, Latin kind of monetary union - or the austere Germanic one described in the new fiscal treaty.