Europe after the euphoria

Public anger at austerity in Greece is echoed in other eurozone countries

Maybe it was the lack of sleep, or that expectations had been exceeded, but there was a whiff of triumph in the post-summit statements at 4am last Thursday.

The heady comments continued into the day, with French Finance Minister Francois Baroin declaring that "the euro has been saved".

Inevitably, a more sober assessment has followed. It is not so much that nothing was achieved - it is more that no one is quite certain what will sustain. The agreement has left a whole raft of questions.

Over Greece: Will the banks volunteer for 50% losses? Many will because of the sweeteners that have been thrown in. The Institute of International Finance believes 90% of banks will agree. But some won't. They cannot be forced to accept losses, because immediately that would become a default. And, in any event, there may be legal challenges to the losses. So the take-up remains unknown.

Then there is Greece itself. Certainly the country has been relieved of a chunk of debt. But the country has turned hostile towards austerity measures dictated from abroad. There is a dangerous mood of resentment and resistance. It revealed itself at the weekend, when the president was forced to abandon his appearance at a national day ceremony as part of the crowd shouted "traitor!"

Few believe that Greece will be able to deliver on its commitments, and further funding will be required. Even on the best-case scenario debt will only fall to 120% of GDP by 2020. Greece is staring down a long road of hardship.

Tapping into surpluses

Then there's the EFSF - the eurozone's main bail-out fund. It has been ramped up (leveraged), or so we are told, to one trillion euros - but no one can explain how the EU gets to that figure. The Europeans are not putting in more of their money. An expanded fund will be hugely dependent on China, Russia, the IMF, and they have yet to declare their hand.

The speed with which President Sarkozy called China to try and tap into their $3.2tn reserves underscored Europe's weakness. The main challenger in the presidential race in France, Francois Hollande, warned that the Chinese would demand something in return. European officials have long pursued influence on the world stage. As so many countries demonstrate, influence comes with economic power.

So on to Italy. The fund - even at a trillion - is not enough to protect Italy if it gets into difficulty. Its borrowing costs are currently unsustainable. Next year it needs to finance 300bn euros of its 1.9tn euro debt.

Silvio Berlusconi arrived at the summit with a 14-page letter of promises to reform the Italian economy. "Will Italy do what it promised?" asked the German Finance Minister Wolfgang Schaeuble. It did not boost confidence in the Italian leader when he referred to the euro as a "strange currency" that had "not convinced anyone". Even if Silvio Berlusconi has the will to reform does he have the credibility to push change through?

There is a very real danger that the Italians - like the Greeks - will resist cuts in wages and benefits.

And all bets are off if Europe does not start to grow again. Certainly the indications are that next year the European economy will shrink.

Perhaps the most revealing insight into the challenge that Europe faces was provided by President Sarkozy in a TV interview when he got back to France. He spoke candidly, telling the French people that "we have entered a new world". France, he implied, had to become more like Germany.

"We spend too much and we must work more," he said. The French social model could only be defended if tough measures were adopted. I recall the strikes and disruption when the French retirement age was increased from 60 to 62. Will France be ready for this new world?

But perhaps the most profound legacy of the summit is that the EU is dividing into two camps: those in the eurozone and those outside.

The Germans are now openly talking of fiscal union and no one knows how far that will go. Will it end with a common European treasury, common taxation and budgets? With such economic integration the eurozone countries would inevitably start agreeing policies that would impact on the European Union as a whole, including the single market.

Watershed for EU

The UK is determined to resist any loss of influence, but fundamental change is on its way. Prime Minister David Cameron knows that Britain's place in Europe has shot up the political agenda. He says the future holds "greater opportunities for a greater rebalancing of powers", but the debate is likely to go further than that.

Changes to the EU treaties will surely spark a wide debate about the future of the union. In some countries giving up control over tax and spending will lead to demands that voters should have their say. Will voters want to live in a very different union? Will Europeans accept that, in order to compete, their welfare state will need significant and painful reform? Can they afford the social model that was built up over the past 50 years? Is the EU - with its single market - part of the solution or does it reduce competitiveness?

A step has been taken towards solving the eurozone crisis, but it is stirring deep questions - not just about the debt crisis but about the future of the European project itself.