Today is an example of how work gets done in Europe. There is what is called a "thematic summit". There are two main items on the agenda: tax evasion and energy. They will be discussed over lunch and five hours later the motorcades will be heading for the airport or the Gare du Midi.

Over tax fraud David Cameron has allies. He wants global action against what he has described as "staggering" losses to the national exchequers. It is estimated in the EU that 1tn euros ($1.3tn; £0.85tn) are lost each year due to tax fraud. Mr Cameron wants to adopt the US proposal of an automatic exchange of tax-related information. He also wants major companies to report tax payments on a country-by-country basis. This is to prevent shifting income to those places with the lowest tax rates.

On arrival in Brussels Mr Cameron said "we've got to make sure that as we set those tax rates that companies pay taxes and that means international collaboration, sharing of tax information".

On one level it is easy to find co-operation on this. The mood of the times has changed. With so many countries cutting spending in Europe it is very appealing to go after tax fraud. Also a combination of activists and hackers have exposed how multinational companies evade taxes.

There are, however, sceptics about this. They point out that commitments have been made before to tackle tax havens. The Italian Prime Minister, Enrico Letta, for one, has spoken of "the incredible hypocrisy" on a European level.

There are still countries like Austria and Luxembourg which are resisting sharing information, although the Austrian Chancellor Werner Faymann said today "we want united rules... it's an injustice and we have to act jointly against tax fraud".

Within the EU there are those who say that Britain has not cleaned up its tax havens. David Cameron has written to UK "dependencies" and told them to embrace tax transparency - but that is a long way from ensuring it will happen.

In the UK there is controversy about Google and the tax it pays. Ed Miliband, the Labour leader, said today "I can't be the only person here who feels disappointed that such a great company as Google, with such great founding principles, will be reduced to arguing that when it employs thousands of people in Britain, makes billions of pounds of revenue in Britain... that it should pay just a fraction of one per cent of that in tax."

The Labour leader challenged David Cameron as to whether he had raised this issue with Eric Schmidt of Google earlier in the week.

The British believe that clamping down on fraud is best done at a global level, with further agreement at the G8 meeting next month and then later with the G20.

It will be interesting to see whether some European states or EU officials try and develop their own alternative standard with Europe-wide legislation. It will be a test whether on an important issue Europe can be pragmatic and flexible in its decision-making.

The summit will also discuss energy. It is a vast subject and vital to the future of Europe and its economies.

Today is for talking rather than decision-making. The challenge is this: the United States has embraced shale gas and the technique of fracking. It already delivers 25% of America's energy needs, at a cost which gives the United States a real advantage over Europe. The question is not just about whether to back fracking; it is also whether Europe and its decision-making is nimble enough to develop cheaper and more reliable sources of energy.

It will be a long, tortuous process, strewn with potential difficulties.

In most areas, although not all, returning powers to Westminster will require a change to EU treaties.

The British Government is convinced that fixing the eurozone crisis will need treaties to be altered. Officials in London and Brussels believe that closer EU integration is necessary for the eurozone's survival and that will require a new legal underpinning.

The European Commission has said it will come up with proposals for treaty change by next May, The German government, too, believes that banking union will require a change to the treaties at some stage.

That will open the door for the UK to raise its own demands. Treaty change would trigger an inter-governmental conference and any country can bring its own list of proposals.

Treaty change requires unanimity and that is both a strength and a weakness for the UK.

If the UK did not get concessions it could potentially block the treaty change but, if that was regarded as essential to helping the eurozone, it would make Britain extremely unpopular. As far as Berlin is concerned that would be the unforgivable sin.

At his lengthy news conference on Thursday, French President Francois Hollande said: "I can understand countries don't want to join the euro, but they cannot impede the consolidation and strengthening of the eurozone and if they want to go further and refuse powers, then the risk is of a splintered Europe."

In any event, some countries are opposed to any moves which would make the UK a special case. It will be tough to get all 28 countries to agree to Britain winning back some powers.

Also, any significant change to the Lisbon Treaty - the constitutional basis of the EU - would almost certainly trigger referendums.

France, in particular, wants to avoid this.

The government in Paris is wary of consulting French voters at a time when the mood is increasingly sceptical of Europe. President Hollande has not forgotten that the French people rejected an EU constitution in a referendum. So the French would only want an adjustment to the existing treaties.

In one area - justice and home affairs - the UK already has an opt-out, set out in the Lisbon Treaty. It means Britain can stand aside from the European arrest warrant for example.

The German government, which remains keen to keep Britain in the EU, shares the view that some powers could be returned but German ministers are saying any changes would have to apply to all countries with no further opt-outs for Britain.

Another option for Britain would be to try to have some legislation repealed - like the Working Time Directive - which sets out the number of hours which can be worked.

It might be possible to negotiate a concession here but then the question is whether it would be regarded as significant enough to qualify as a fundamental change to Britain's relationship with the EU.

The government would almost certainly want concessions on social and employment legislation. The problem with this approach is that some countries would fear and suspect that Britain was negotiating for itself a competitive advantage.

The government has not yet said what its demands would be.

It is still assessing what "competences" should stay with Brussels or should be returned. The original plan was not to begin any re-negotiation until it was clear what the "new" Europe would look like and where that left the UK. It may still take years for Europe's new architecture to emerge and that might further complicate the government's task.

It is safe to say that nothing will happen swiftly.

In the face of disastrous poll ratings and an economy in recession he came with a big idea for the future. He proposed an economic government for the eurozone.

It would meet every month and would have its own president. He envisaged it raising taxes and having its own budget and even issuing its own debt. He capped this with a promise of closer political union in two years.

This grand vision had little to say about French unemployment now which has reached 10.6%. Indeed the president said rather optimistically that "the unemployment trend can be reversed before the end of the year".

It was left unexplained how this economic government would discover the growth that the president has made his priority. It was unclear whether this idea had been discussed with German Chancellor Angela Merkel who is, indisputably, Europe's most powerful leader.

Speaking just before the French president, she said: "What we need above all is a common understanding in Europe - and unfortunately there isn't one yet - of where growth comes from."

She accepted she might not have a "bosom friendship" with Mr Hollande but insisted their working relationship was good.

She is unlikely to welcome the idea for common debt or for an economic government.

It was also not explained by the French president whether the plan would be put to the French people, who were revealed this week to be as wary of further integration as the British.

Rather the plan seemed destined to silence all those critics in France who say that the country's influence is waning in Europe and that it is now a German Europe.

The French president was in apocalyptic mood. "If Europe does not advance it will fall," he said, "or even be wiped out from the world map... my duty is to bring France out of lethargy."

His predecessor had warned that if the euro failed, Europe would fail and conflict could return to the continent.

President Hollande blamed the economic crisis in France on the eurozone's strict austerity policy and welcomed moves by the European Commission to ease up on austerity and targets for cutting the deficit.

Much of this lengthy press conference was directed at the future. What remains unclear is how the French president and his government will bring unemployment down. That will require annual growth of at least 1.5% and remains a distant dream at present.

Berlin went out of its way today to play down friction with France. Indeed the German foreign minister said that Germany must not act with "Teutonic arrogance" towards its neighbours.

But for months now German officials in private have been expressing their frustration with Paris and with the president. France, they insist, needs far-reaching structural reforms to restore its competitiveness. They did not hear much detail on this from the French president today.

The new president rode up the Champs Elysees in an open-topped Citroen in the pouring rain and emerged bedraggled.

Before the day was out his plane had been hit by lightning while en route to see Angela Merkel. For some it was an inauspicious start.

Mr Hollande had won the presidency because he was not Nicholas Sarkozy, who the French had grown weary of. He had cleverly sold himself as Mr Normal in contrast to the flashy and hyperactive Sarkozy.

He openly challenged the German prescription for Europe of putting austerity first.

Mr Hollande's promise was to pursue growth and jobs while at the same time preserving the French way of life.

In the event, the economic news has been grim. Unemployment has marched steadily higher towards 11%. Today, the economy is back in recession and growth forecasts have been cut.

France has been given an extra two years to meet its target for cutting its deficit and through all this the French consumer has lost confidence (the French finance minister insisted today that France would achieve growth of 0.1% this year).

Mr Hollande has at times seemed uncertain. On the campaign trail he had declared the world of finance his adversary. It had prompted him to impose a tax rate of 75% on those with salaries over 1m euros.

But the tax became bogged down in a legal challenge and there were some high-profile departures from France.

He had promised- for some workers - to bring down the retirement age to 60 from 62. Now raising the retirement is back on the agenda.

The Germans were very critical of what they saw as President Hollande's slowness in reforming the French economy.

The government has now passed a law making it easier to lay people off and for employers to be able to adjust pay and conditions in difficult times.

The president, however, has moved cautiously, unwilling to offend his natural supporters on the left. Many of them have become disillusioned as big companies have continued to shed labour.

During the campaign Francois Hollande had stood on top of a vehicle outside the ArcelorMittal steel plant in Lorraine where blast furnaces were facing closure. He promised to do everything to keep the site open.

Now he stands accused of a "broken promise" as the furnaces are moth-balled.

Recent surveys show the French to be among the most pessimistic in Europe. That has made them reluctant spenders and consumers.

Spending on cars, for instance, is down 18%. They have cut back on buying computers and mobile phones. And even though the German economy has only narrowly escaped recession, the prospects for it are much brighter.

In the past France and Germany together provided the motor for the European Union.

Now Germany is the indispensable power. France has seen its influence wane. The relationship between Angela Merkel and Francois Hollande is strained.

Increasingly, Berlin sees France as edging into the southern European camp of countries in difficulty and becoming the champion of those questioning the emphasis on austerity.

All of this and the occasional scandal has undermined Francois Hollande's presidency. The criticism -even from allies - is that it has been a wasted year; 12 months of lost time as his former partner said.

Polls suggest that more and more French people understand that fundamental change will have to be embraced to make France competitive again.

Here's the question - can Francois Hollande emerge as a reforming president or is he too timid, too indecisive, too beholden to those who want to preserve the French way of life with its strong welfare safety nets?

What is interesting is that it no longer reflects the simplistic divide between doubters and believers.

No-one following events could avoid the depth of unease at the heart of Europe. Only this week Joseph H.H. Weiler, president-elect of the European University Institute, said "the crisis really threatens the European way of life; it is not less serious than Europe emerging in the late 1940s".

The new Italian Foreign Minister Emma Bonino - a believer in a United States of Europe - said "with every passing day, the founding fathers' dream of peace and freedom, a dream that had become a reality for my generation seems to be turning into a nightmare for many".

The UK MEP Andrew Duff spoke of "a critical year to save the EU".

So, on Europe Day, it was interesting to listen to the tone of the President of the European Commission, Jose Manuel Barroso.

In the past he has assumed the role of chief cheerleader but he chose to point out that "more Europe" does not mean "more Brussels".

He insisted that deeper economic integration was necessary for the success of a common currency. That, of course, raises questions about democratic accountability but Mr Barroso's approach was less about belief and more about what might work.

Some of this is mirrored in the British debate which is now in full flow. On Sunday, Education Secretary Michael Gove said that Britain leaving the EU would be "perfectly tolerable". His position later won the support of Defence Secretary Philip Hammond.

But, at a lecture at the LSE earlier this week, Sir Malcolm Rifkind argued that it was "overwhelmingly in Britain's interest to remain a full participant in the biggest single market in the world, with the ability to shape the rules".

But the former UK foreign secretary believes in an EU with different tiers of membership. He believes it exists already and will be the reality of the future. It remains to be seen, however, whether the UK government can significantly renegotiate the terms of its membership. There will be resistance to what will be seen as "Europe a la carte".

There are others apart from the British who insist the project needs far-reaching reform.

In France and Germany there is deep-rooted opposition to further integration apart from what is necessary to save the single currency.

In France polling suggests growing doubts about the European project. In Germany the new and yet still small Alternative for Germany party not only claims that the euro is dividing Europe but wants some legislative powers repatriated from Brussels.

What all of this indicates is a wider appetite for reform.

Part of what is driving this are the levels of youth unemployment and the question of whether Europe is working. As the former UK Foreign Secretary David Miliband said, "the antidote to European scepticism is founded on youth delivery".

And, increasingly, there is recognition that the question is not either "ever closer union" or not.

It is: "Can the EU and its structures and institutions deliver for a new generation?"

The question may open the door to greater flexibility and reform. The debate in Europe is fundamental and just getting started.

Elections will be held to the European Parliament between 22 and 25 May 2014.

Privately European officials concede this could prove another challenge for the European project. The reason is the rise of anti-establishment parties, suspicious or even hostile towards Brussels.

The turnout in European elections has been steadily falling. It was 43% in 2009. The poll, in some countries, is seen as an opportunity to make a protest or to punish a national government in office at the time.

In the past this did not matter so much. The European Parliament had less weight, but the Lisbon Treaty has given it more power and, recently, it has been more assertive.

The parliament has taken the lead over capping bankers' bonuses. MEPs like Othmar Karas and Philippe Lamberts have become significant players in the field of financial regulation. Arlene McCarthy, Labour MEP for the North West, has become influential in restructuring the EU's banking sector and in proposing a financial transaction tax. Sharon Bowles, Lib Dem MEP for the South East of England, chairs the increasingly important Economic and Monetary Affairs Committee. Leading MEPs like Guy Verhofstadt and Hannes Swoboda have been outspoken on the eurozone crisis.

The importance of their voices reflects the growing influence of the European Parliament. The fear among EU officials is that after next year's elections the parliament will have a significant number of new MEPs carried to Brussels on the votes of the disillusioned.

Recession and austerity have left the mood in Europe fractious. It is reflected in the rise in Italy of the anti-establishment Five Star Movement, which was the success story in the recent Italian elections.

Five Star's appeal was its demand for radical reform of the Italian political culture, but its leader Beppe Grillo has also questioned remaining in the eurozone.

The movement's new MPs have stayed outside government and they expect the newly-formed coalition to be short-lived and to reap the benefits in future elections.

In France, with a stagnant economy and an unpopular president, the polls suggest a rise in popularity of Profile: Marine Le Pen and her National Front. In one poll she was seen as making it through to the final round of a presidential poll if it were held now. She is outspoken in blaming austerity on Europe. "France," she said, "is sinking into an absurd policy of endless austerity because it is always about saying yes to Brussels".

In Greece, the radical left party Syriza, which is highly critical of the austerity policies of the current coalition in Athens, may well be able to tap into the discontent with an economy which is shrinking for the sixth year in a row.

Even in Germany the new Alternative for Germany party, which is demanding repatriation of some legislative powers from Brussels, may spy an opportunity in the European elections.

It is a race against time, says one senior EU official. He predicted a few months ago that the EU had two years at most to restore growth or all bets are off.

The hope in Brussels is that by May next year growth will have re-emerged and that there are the first signs of employment rising. The key, I was told, is that however weak the green shoots may appear, a corner appears to have been turned.

It will be a close run. The return of growth is being pushed further into the future. Currently France, Italy and Spain are all reporting a decline in manufacturing output. Only yesterday (Monday) the forecast was for Italy's economy to shrink 1.4% this year and to grow by 0.7% next year, but for unemployment to continue rising.

Come next May unemployment may still be rising in Greece and Spain.

The European elections are yet another reason why those countries seeking more time to balance their public accounts and reduce their deficits are likely to find a sympathetic ear in Brussels. Also don't expect the elections to be as before. Some very senior voices are planning to characterise the vote as about the future of Europe.

Some had expected a larger cut, in response to growing anxiety in Europe over growth and unemployment.

The President of the ECB, Mario Draghi, said: "labour markets remain weak... Weak economic sentiment has extended into the spring of this year". Mr Draghi expects recovery later in the year, but that has been predicted before.

Suddenly - or so it seems - everyone's priority is growth and employment. The austerity fetishists have left the stage - almost. Today it was the turn of the President of the European Council, Herman Van Rompuy, to say that "after three years of firefighting, patience with austerity is understandably wearing thin".

Only this morning the new Italian Prime Minister Enrico Letta was in Brussels. He was once again direct, as he has been since taking office. "Youth unemployment," he said, "that is the real nightmare of my country and the EU".

Official heads nodded in agreement but, at some stage, there will have to be an accounting. How did Europe end with unemployment for under 25-year-olds at 59% in Greece, 55.9% in Spain, 38.4% in Italy, 38.3% in Portugal? Why has it taken so long for official voices to speak up? Could this have been avoided or was this judged to be the price for saving the euro?

And even if youth unemployment was not the focus of attention there is the story of manufacturing. Output declined again in April. Manufacturing in France, Italy and Spain all reported a contraction in manufacturing business. As Mario Draghi said, output has declined for five separate quarters.

The first question after today's rate cut is whether it will make a difference? It boosts confidence certainly. It sends a signal that Europe is making growth its priority, but will these lower costs be passed on to the small and medium-sized companies, which are the engine room of most European economies? In the past the banks - trying to shore up their own defences - have not always passed on lower rates to customers. The ECB recognises that "tight credit conditions" remain for many companies.

If consumer and business confidence remains low then Mario Draghi made it clear that the ECB was ready to act again on rates.

There is a new mood in Europe. It is more fear than panic. The medicine is not only judged to be failing, but there are plenty of voices out there claiming it is killing the patient.

Despite a cacophony of claims that the eurozone crisis is over, and numerous sightings of green shoots, many of the economies in southern Europe are not recovering. Unemployment in the eurozone is at 12.1% and the zone's economy will shrink by 0.5% this year.

Unemployment is of greater concern in the corridors of Brussels than debt. It seems that almost every speech is now peppered with a reference to growth and jobs.

The ECB is under pressure to make a cut, less because there is evidence that it will make a difference but more because there is a groundswell that something must be done.

As I have written before, we are in the midst of a retreat from austerity. It is being discarded like unwanted clothing. The new Italian Prime Minister, Enrico Letta, could not have been clearer. "I'll speak to you in the subversive language of truth," he said, "fiscal rigour alone will kill us". It is what France's President Hollande believes. However much the French Socialists have tried to water down the language in their leaked document they believe Angela Merkel is an "austerity Chancellor'' guilty of "selfish intransigence".

A very senior European official told me in December that the Union had two years to find growth, otherwise all bets are off. At the moment growth remains over the horizon. If the price of keeping the euro together is years of deflation, then sooner or later one country or another will be unwilling to pay it. In the end Europe will be judged not by its ideals but whether it can deliver a modern innovative economy with jobs.

In the search for a solution targets for reducing deficits have become negotiable. The European Commission has not announced a U-turn, or that it got the policy wrong, it is just regularly easing targets for countries like Spain, Greece, Ireland, Portugal and France. It does, of course, raise the question: what was the point of the Stability and Growth Pact? It is clear that, in current times, the targets for cutting deficits are open for negotiation.

The Germans still maintain that cutting deficits and implementing structural reforms opens the road to growth later. German ministers are adamantly opposed to borrowing to boost growth. They are anxious that France might openly challenge their policy of reducing deficits and so make more obvious the big divide with Germany which already exists.

An example of how much is changing: remember candidate Hollande declaring that the world of finance was his adversary. This week the embattled French president declared that "our first duty is to stimulate the spirit of business and initiative in our country. It is business that creates wealth, activity and jobs." The socialist president has discovered he needs the business community.

All of this testifies to the fact that a note of desperation is creeping into European discussions. Sooner or later, as the official told me, they must deliver or all bets are off.

That is why the markets expect a rate cut tomorrow. Above all what they want is for low rates to be passed on to small and medium-sized businesses, particularly in southern Europe.

For amidst all the sightings of green shoots, the lines of those without work serve as a reminder that the crisis in Europe is far from over.

In Spain, the general unemployment level has risen to 27.16%. It means there are six million without work.

The government in Madrid has tried to draw some comfort from the fact that the rate at which jobs are being shed is slower than in previous quarters. The Prime Minister, Mariano Rajoy, says: "Next year we will have growth and jobs will be created in our country."

It is, perhaps, the fate of leaders that they are destined to live in hope. So far, the government has misjudged the severity of the recession. The economy is expected to decline this year by 1.6%.

In the southern Spanish city of Jerez, unemployment is close to 40%. It is not difficult to find couples like Lorenzo Barba and his wife Yolanda. He lost his job - driving trucks - two years ago. His wife was laid off from the hotel sector.

They are under threat of being evicted from their apartment. They scrape by. The fridge is almost empty. For five months, they have not been able to afford fish or meat for themselves in order to give their seven-year-old son a balanced diet.

"There is no future in Spain,' says Lorenzo Barba.

"Three generations are being destroyed - mine, my parents' generation because they are supporting us. And the worst part is what will happen to my son."

And herein lies the Spanish nightmare. For the country to see unemployment decline, it needs growth of more than 2%. No one is predicting that at the moment.

So as Daniel Fernandez Kranz, from the IE business school, points out, it is likely that unemployment will continue rising for three or four more years. That will test the resilience of Spanish democracy.

There is some good news from Spain. Its borrowing costs have fallen to levels not seen since 2010. The country is judged as less risky by investors. The current account is moving towards balance and exports are up.

Daniel Fernandez Kranz says it is a story of two economies. The large companies are benefitting from the lower wage costs but the smaller companies, which are the lifeblood of the economy, are still shedding staff.

And perhaps the most important fact to remember: economic activity is still declining. Tough times still lie ahead for Spain.

France is waiting for its unemployment figures, which are also due. They, too, are expected to increase and that will be acutely embarrassing for President Francois Hollande who promised, during his election campaign, to bring unemployment down.

Although some steps have been taken to free up the labour market, it remains a daunting task to set up a new business in France and take on staff.

The fear, in Europe, is that France is sliding into the camp of southern European countries, with little or no growth, rising unemployment and declining consumer and business confidence.

In terms of its influence, no one can remember when France counted for so little in Europe.

Today's figures will only reinforce what I wrote about earlier in the week - the retreat from austerity. Spain will miss the target for cutting its deficit but will discover that Brussels is more relaxed and, most likely, will give Madrid more time.

Growth has replaced reducing debt as the priority. You can sense Angela Merkel's unease about the resistance to austerity when she said: "I call it balancing the budget. Everyone else is using the term austerity. That makes it sound like something truly evil."

Today's figures may persuade the European Central Bank to cut its interest rate and the markets will cheer that.

But today also underlined what the President of the Bundesbank, Jens Weidmann, said this week - that it might take a decade to exit this crisis and that will test democracy, social cohesion and support for the European project.

Information published by the European Council on Foreign Relations found that 72% of people in Spain said they did not trust the EU.

The retreat is disguised, but cannot be concealed. The President of the European Commission, Jose Manuel Barroso, said: "While I think 'austerity' is fundamentally right, I think it has reached its limit." He implied that a policy can only be pursued if it has "a minimum of political and social support".

There is not a general recanting yet, but the explanations are flying thick and fast as to why the policy that Europe has embraced for the past three years must change.

The EU's Economics Commissioner, Olli Rehn, said: "A period of reduced spending and borrowing was necessary to calm markets concerned about out-of-control debt levels, particularly in peripheral European countries. That time has passed."

The policy of austerity first - authored in Berlin - never had a consensus behind it, but it now lies widely discredited. The French government does not believe in it. President Francois Hollande said only recently that "sticking with austerity would condemn Europe not just to recession but an explosion".

Only last week, in an editorial, the New York Times said: "All evidence shows that this bitter medicine is killing the patient."

Some of the critics of the austerity first policy are in full cry. Hannes Swoboda, president of the Socialists and Democrats (S&D) group in the European Parliament, said that "five years into the crisis, Commission President Barroso has finally recognised the reality: austerity is neither effective nor socially viable".

Many German officials insist, with some evidence, that reducing deficits and spending has been key to calming the crisis and preventing the break-up of the eurozone.

Even so, in an effort to reduce deficits and make southern Europe more competitive, countries have been reducing demand, even at a time of recession.

The result is what the Greek prime minister acknowledged was "Europe's Great Depression". Greece has seen its economy shrink by 25% in five years. Spain's recession is three times deeper than forecast. The IMF predicts its economy will shrink 1.6% this year. Its general unemployment level is at 27%.

As the New York Times pointed out, Portugal cut its fiscal deficit by a third between 2010 and 2012 and saw unemployment rise to 18%. Across Portugal, the Republic of Ireland, Greece, Italy, Spain and Cyprus the best educated are on the move, seeking work beyond their own countries.

The policy is partly changing because its intellectual underpinning has been challenged.

Two economists - Carmen Reinhart and Kenneth Rogoff - were two of the gurus behind European austerity. Their basic thesis was that when debt rose above 90% of GDP, growth would decline sharply. Olli Rehn, for one, spoke of "the 90% rule".

Now there are serious doubts about the accuracy of that thesis. It is also being asked why European officials were determined to bring deficits below 3%. In many instances the deficit targets seemed arbitrary. The IMF is not alone in acknowledging it underestimated the impact of spending cuts on growth.

So the austerity believers are in retreat. Ireland and Portugal have been granted seven more years to meet their targets. Spain is likely to miss its target for reducing its deficit. Indeed, it had the biggest public deficit in the EU last year. Increasingly it looks as if it will get more time. Perhaps two more years. Suddenly targets are being eased and relaxed.

For what Europe's leaders and officials fear more now is unemployment, recession, and growing disillusionment with the eurozone that seems unable to deliver. Reducing debt is no longer the priority.

But the question remains - could the devastation of the economies of southern Europe have been avoided, or has that been the price of preserving the eurozone?

Doubts about its economic survival have re-emerged after it was revealed that the country needed to find 6bn euros (£5bn; $8bn) more than was agreed just three weeks ago. All the indications are that Cyprus itself will have to find the extra money. There may well be steeper taxes and even a sale of part of its gold reserves. This would be another first in the shifting territory of eurozone bailouts.

During the initial negotiations Europe turned a harsh face towards Cyprus. It needed a 17bn-euro rescue. The IMF, EU and ECB only agreed to stump up 10bn. The rest would have come from Cyprus itself and from those large depositors in the Bank of Cyprus and Laiki (Popular) Bank.

Germany, in particular, believed it was morally right that depositors, and not just their own taxpayers, should shoulder the burden of saving Cyprus. Germany also was insistent that the Cypriot business model - as an offshore banking sector - was not sustainable. Yes Cyprus was to be bailed out, but its financial sector would be broken.

In the aftermath of the rescue it was predicted that the Cypriot economy would shrink between 10 and 12% in two years. Some feared a steeper decline. After all, in Greece the economy has contracted nearly 25% in five years.

Now it seems further tax increases are inevitable and large depositors will be squeezed again. Some say this extra burden will further choke off the means of recovery.

It touches on the most fundamental question facing the eurozone: is its policy of reducing deficits and structural reforms saving or killing the patient? The Germans insist that growth will come from tighter budgets and reformed labour laws. They might be right in time, but southern Europe is in deep crisis now.

As the eurozone finance ministers gather today in Dublin for an informal meeting the list of problems only grows larger: what will they do about Cyprus, whose black hole is bigger than first thought? What will they do about Slovenia, which is in danger of becoming the sixth country to need bailing out? Will they extend the period for repaying debt for countries like Portugal and the Republic of Ireland? How will they deal with Spain - with 27% unemployment - and still struggling to revive its economy?

Over the New Year the optimists had a good run, but the time-scale for growth returning is forever being pushed back. The recession, in some countries, is deepening. Consumer demand in Italy and France has all but collapsed.

The Americans this week urged increased government spending and a looser monetary policy in Europe. Berlin and Brussels - the architects of this policy - see no need to change course. The German Finance Minister Wolfgang Schaeuble said "nobody in Europe sees the contradiction between fiscal consolidation and growth".

Privately European officials are very anxious. They are uncertain where growth will emerge from. Those doubts will be reflected in a softening of targets, in an easing of terms that does not quite add up to a U-turn, but signals their doubts that the policy to save the eurozone is working.

Another French President Jacques Chirac said: "She was one of the most feared figures on the international stage."

He went on to say: "What made her great in my view was above all her conviction... She never doubted being in the right."

At the same time he once asked about Margaret Thatcher: "What does she want from me, this housewife? My balls on a plate?"

The caricature of Margaret Thatcher was of a UK prime minister constantly "hand-bagging" other European leaders.

The story was often told of her attending a summit in 1984, banging the table, and demanding: "I want my money back."

She fought fiercely for a British rebate, but she actually said: "We are simply asking to have our own money back."

There were, however, many sides to Margaret Thatcher's relationship with Europe.

When the Berlin Wall came down in 1989, she was opposed to German reunification. Helmut Kohl, the German chancellor at the time, recalls her saying: "We beat the Germans twice and now they're back."

In time she understood that Germany could not remain divided and supported the need to embed the new Germany inside Europe and its institutions.

She became a strong supporter of eastern and central European countries joining the European Union.

So today the current German Chancellor Angela Merkel recalled her as "one of the greatest leaders in world politics of her time. The freedom of the individual was at the centre of her beliefs so she recognised very early the power of the movements for freedom in Eastern Europe... I will never forget her contribution in overcoming Europe's division and the end of the Cold War."

Margaret Thatcher was a strong supporter of the single market in Europe and signed the Single European Act.

Her critics say that she saw the benefits of an open market but failed to appreciate that the management of that market would inevitably lead to handing over of some sovereignty.

What she opposed was using the single market as a stepping stone to closer political union.

In her keynote speech on Europe, delivered in Bruges in September 1988, she said: "We have not successfully rolled back the frontiers of the state in Britain, only to see them re-imposed at a European level with a European super-state exercising new dominance from Brussels."

That became the great divide.

Many of Europe's leaders were committed to closer integration. They believed in it, with the single market but a staging post.

Margaret Thatcher became viscerally opposed to handing over more sovereignty. In her book Statecraft, she described the European Union as "perhaps the greatest folly of the modern era".

The former Czech President Vaclav Klaus - and an avowed Thatcherite - said: "Many of us will never forget her famous speech in Bruges, where she clearly said that the suppression of nation states and the concentration of power in Brussels will destroy Europe."

It was her rejection of further integration at an EU summit in Rome that prompted a rebellion and resignations within her own cabinet and led eventually to her downfall.

Divisions over Europe to this day have become embedded in the Tory party.

On the whole, Europe's leaders have been warm with their tributes.

French President Francois Hollande described her as "a great figure who left a profound mark on the history of her country".

The president of the European Commission, Jose Manuel Barroso, described her as a "circumspect yet engaged player in the EU".

But he also added: "Her legacy has done much to shape the United Kingdom as we know it today, including the special role of the UK in the European Union that endures to this day."

Britain's current ambivalence towards the EU is part of Margaret Thatcher's legacy: the totemic role of the rebate; the insistence on opt-outs; the belief in British exceptionalism; the profound unease at power slipping away to a bureaucracy in Brussels.

Britain has never committed to the idea of Europe. It is indifferent to the dream of ever-closer union. It fears the weakening of its own power as more and more decisions are taken at a European level in Brussels.

European officials recognise that it was Margaret Thatcher who shaped many of the UK's instincts towards Europe.

They learnt early that Lady Thatcher was a conviction politician. She approached every meeting or summit with passionate intensity.

Europe's leaders had built their project on compromise, on trade-offs, on bargaining. The first British woman prime minister came from a very different tradition; arguments were to be won.

It is not about the recent scandal, which caught a French minister, Jerome Cahuzac, lying about his bank account in Switzerland. That certainly has embarrassed President Francois Hollande and has triggered the question of who knew what and may still lead to a government reshuffle or more.

It is not about another close ally of the president who had an account in the Caymans. Yes it sits uncomfortably with the rhetoric of the presidential election, during which Mr Hollande said "my true adversary is the world of finance". It revives the suspicion that the circle around Mr Hollande are "champagne socialists". Already the firebrand of the left, Jean-Luc Melenchon, is calling for a demonstration to "purify" the left.

It is the French economy that lies at the heart of the malaise. Sooner or later radical decisions will have to be taken. Mr Hollande campaigned on a growth ticket, but has watched the prospects of growth retreat.

He promised to challenge the German strategy for Europe of cutting deficits while restructuring economies. Mr Hollande does not believe the medicine is working. Indeed, recently he said "sticking with austerity would condemn Europe not just to recession but to an explosion". But it is the German narrative which prevails.

In the 11 months since President Hollande came to power, unemployment has risen in France to 3.2 million, the highest it has reached since 1997. Debt has gone above 90% of GDP. The promise to reduce the deficit this year to 3% of output has been discarded.

France is an important enough country to stand up to the European Commission, and there may well be further flexibility in reaching agreed targets for reducing the deficit.

But the core dilemma remains. France needs to find 60bn euros (£51bn; $78bn) of spending cuts by the end of 2017. The rich - many of whom have boarded the trains to London and Belgium - have been soaked. There is little alternative than to cut spending. Mr Hollande understands the challenge. Only recently he said that "public spending has reached 57% of national wealth. It was 52% five years ago. Do we live better for it? No."

Cutting the size of the French state would never be easy - particularly for a French Socialist. But cuts will have to be made at a time the economy is flat-lining. Consumer spending is in retreat. Car sales have collapsed.

President Hollande's appeal at the last election was that he was not Nicolas Sarkozy and that he would preserve the French way of life. It was a feel-good campaign - but reality has struck quickly. The challenge for the president is whether he will tell the French people that their social welfare model is not sustainable and that far-reaching reforms are necessary.

Some new rules have been adopted to loosen France's strict labour regulations. They are regarded as a start, but no more.

What so rattles the officials in Berlin and Brussels is the fear that France could slide into the category of those southern European countries in trouble. That has not happened yet, but the concern is of the markets losing faith in Paris.

On Monday President Hollande will have a working dinner with David Cameron. The British prime minister is looking for changes to the EU treaties as a means to winning some concessions for the UK. The French and the Germans (Mr Cameron will be in Berlin later in the week) may not oblige. They have cooled on treaty change, even if the eurozone crisis demands it.

In the case of President Hollande the last thing he would want is having to put a treaty change to the French people. In their current mood and faced with a stagnant economy they might well reject any referendum.

As Andrea Broughton from the Institute for Employment Studies points out: "At the lowest end are Austria, with an unemployment rate of just 4.8%, Germany (5.4%) and Luxembourg (5.5%).

"This contrasts with Greece, where the rate is 26.2% (December 2012 figure), Spain, with a rate of 26.3%' and Portugal, with a rate of 17.5%."

Perhaps the most disturbing figure is for youth unemployment. The average rate for the under 25s in the EU is 23.5%. Nearly a quarter of Europe's youth are not working. In Spain the figure is 55.7%.

For the moment the strategy for keeping the eurozone together is sharpening Europe's divide.

The Germans believe that a combination of austerity and structural reforms will eventually spark growth in southern Europe and narrow the gap in competitiveness.

There are a significant number of officials and economists, however, who doubt the policy is working. Indeed they believe that several countries are now trapped in a cycle of decline.

Only this week the French President Francois Hollande said that "sticking with austerity would condemn Europe not just to recession but an explosion".

So far Europe's young people have been remarkably tolerant of unemployment levels reminiscent of the Great Depression.

There has been some burning of EU flags and anger with the Germans but Europe's so-called lost generation has not yet challenged the role of Europe and its institutions.

Brussels and Europe's leaders have been able to blame the crisis on the financial crisis of 2008 and to insist it was "made in America". But the truth is somewhat different.

The structure of the eurozone, with one interest rate for all, enabled countries like Spain to embark on a construction boom. Ireland had a similar story. Greece initially benefitted from unrestricted flows of outside capital and wages soared.

What the financial crisis in America did was to bring the party to an end. A reckoning followed. The price is still being paid with wages and costs being slashed in an attempt for these mainly southern countries to regain competitiveness within a monetary union.

The question remains: in the end were the economic differences between the countries which adopted the euro too great and are millions of young Europeans paying for that mis-judgment?

Whilst the official line is that the euro has been saved, privately there is far more anxiety.

Increasingly the threats to the eurozone are seen as not so much the bond spreads, but the combination of deepening recession and rising unemployment in parts of Europe.

As Nicholas Spiro of Spiro Sovereign Stategy said, "the surge in joblessness coupled with this morning's grim PMI surveys [manufacturing surveys] are a glaring example of the extent to which market sentiment towards the eurozone has become detached from economic fundamentals. The disconnect is most pronounced in Spain and Italy but is also manifest in France".

Europe's leaders are in the fourth year of fighting this crisis and the reality is that the gap between some of those countries which share the common currency is only widening.

Their angry chants were directed at the troika, the EU and in particular Germany's Angela Merkel. There were banners linking Mrs Merkel to Hitler. Outside parliament they shouted "Merkel is a whore!" Such a scene would have been unimaginable in Europe only a short while ago.

The eurozone crisis has soured relations between Germany and southern Europe. I have heard anti-German rhetoric in Italy, Spain, Greece and Cyprus.

The currency intended to bind Germany into Europe has ended up sowing division.

Germany did not, I believe, seek a leadership role in Europe. Its economy, however, has made it Europe's indispensable power. In order to keep the eurozone together Berlin has prescribed its medicine - cuts to the deficit and structural reforms that are intended to usher in growth later. To survive in the eurozone these mainly southern European countries are being told to regain competitiveness by cutting wages and benefits.

The ultimate test for the eurozone is whether this strategy will work. The German Finance Minister, Wolfgang Schaeuble, told the Athens daily Ta Nea that he believed the austerity measures were not just working but making up for decades of policy lapses.

If growth returns and if these "Club Med" economies spring back to life then all will be forgiven. But if the future is hardship, job losses and recession then ultimately the European project itself will be challenged. Today students were saying the EU had robbed them of their future.

As each day passes the Cypriot economy declines. This was a working day, but the centre of the capital Nicosia was a ghost town. There are figures (unsourced) that the economy has lost 2bn euros (£1.7bn; $2.6bn) in the past 10 days alone. No deals are being done, no investment plans are being made.

One of the local papers mocked President Nicos Anastasiades, who had spoken of "the best possible deal". The paper said "the best possible deal will push us into a prolonged slump, that will shrink the economy beyond recognition". That is the prevailing view: that the medicine prescribed by the Eurogroup - the eurozone finance ministers - will kill the patient.

Not surprisingly today the Cyprus Finance Minister Michalis Sarris said the country was facing an "emergency". They are struggling to put in place capital controls to prevent a bank run when the banks reopen, possibly on Thursday. They are still working on the details of the plan. There is likely to be a limit on withdrawals and a limit on the export of euros.

Although it is not clear why, the Chairman of the Bank of Cyprus, Andreas Artemis, resigned today.

All of this is having a devastating effect on the economy. Those with large deposits in the banks (above 100,000 euros) do not know the scale of their losses - but the expectation is 40%.

Europe seems uncertain whether forcing depositors to take a "haircut" is a one-off or the model they will use in the future. Jeroen Dijsselbloem, the head of the Eurogroup, spooked the markets by implying the Cyprus bailout was the template. Today a board member at the European Central Bank, Ewald Nowotny, challenged that view by saying the Cypriot banking crisis was a special case and not a model for the future.

Cyprus has exposed the insecurity of Europe's leaders about their currency's future.

It will stay in the eurozone and will receive a 10bn euro bailout.

The tension is not disguised. Many Cypriot MPs believe they are being blackmailed into doing what the eurozone wants.

The queues for money are small. Yet beneath the surface the economy is under strain from the closed banks.

As the economist Paul Krugman put it, it was as if Europeans were holding up a sign which read "time to stage a run on your bank". In Europe's corridors of power there is the sound and sight of officials pointing fingers and rowing back from previous positions held.

As part of a bailout deal for the island of Cyprus they have decided to impose a tax on savers. It has not been done before in the eurozone crisis, its legality may be questioned and the risks and consequences are unknown. Savers with deposits of over 100,000 euros ($130,000, £86,000) will face a one-off tax of 9.9%. For those with less funds in their accounts the tax will be 6.5%.