EU fiscal summit: Hope comes to the eurozone

Angela Merkel (centre) smiles at Denmark's Helle Thorning-Schmidt (right) at the summit

There is a new and unexpected mood coursing through Europe's corridors. It is optimism. Like spring blossom it is seized on as a sign that the seasons are changing.

The President of the European Commission, Jose Manuel Barroso, said: "It's time to move from crisis mode to growth mode."

UK Prime Minister David Cameron picked up the scent when he said: "There was not the same air of crisis about this summit."

The Prime Minister of Denmark, Helle Thorning-Schmidt, who currently chairs the EU, said: "For the first time in many, many months, this is not a crisis summit."

Confidence is not to be dismissed, but it is always worth returning to the real economy.

Recession year

Firstly, for many European countries 2012 will be a year of recession. The Portuguese economy will contract by 3.3%, Greece by more than 4%. Spain will shrink by 1.7% in 2012. Italy, too, will be in recession.

Unemployment is continuing to rise. Over 24 million are without work. In the eurozone 10.7% do not have jobs. For young people, the rate has reached 21%, the highest since the single currency was introduced.

In Spain unemployment is predicted to reach 24.3% this year.

And so countries are struggling to bring down their deficits. Spain now says the deficit for 2012 will be 5.8% of GDP, well wide of the agreed target of 4.4%.

Even the virtuous Netherlands has announced that its provisional deficit for 2012 will rise to 4.5% of GDP, from 4.1%. Other countries are also having difficulty meeting their agreed targets because, as the spending cuts bite, so tax revenues fall.

Several countries have indicated they have reached the limits of austerity.

Mario Monti's government in Italy does not expect to make further spending cuts. Neither do the French.

In Italy the emphasis has shifted to growth. At this summit Mario Monti said: "it is a good sign that the crisis has left the scene a little, but let's hope forever, and we can now concentrate on the issue of growth."

But in countries like Italy, Spain and Greece growth is elusive. So-called structural reforms - making it easier to hire and fire and opening up closed professions - all take time.

The old ways continue. In Italy there is growing resistance to reform. And the truth is that massive changes are needed for these countries to regain competitiveness.

Most of the reforms have not yet been adopted and yet the eurozone believes the worst is behind it.

Cheap loan boost

Much of this optimism derives from action by the European Central Bank. It has flooded the banking system with cheap loans.

Banks have taken a three-year loan at 1% and bought up government bonds in countries like Italy and Spain, so forcing down their borrowing costs.

Sony Kapoor from the Re-Define think tank says: "The palliative of the new long-term financing operation by the ECB cannot hide the deepening problems of the eurozone for long."

The Germans were always wary that such an infusion of funding would reduce the pressure for reform. That may already be happening.

At this summit 25 leaders signed a new fiscal pact. It will increase tighter controls over budgets.

Countries will have to sign up to balanced budgets over the course of the economic cycle. If a country violates the deficit ceiling of 3% there will be automatic sanctions.

The pact will now have to be ratified by individual countries. The Irish will put it to a referendum. But if 12 eurozone countries support the pact, it will become law.

It was ironic that on the very day the leaders put their signature to a piece of paper strengthening budget discipline the Spanish said they would not meet agreed targets for reducing their deficit.

The Spanish are pleading special circumstances - precisely as countries did before. Spanish Prime Minister Mariano Rajoy said: "I did not consult other European leaders and I will inform the Commission in April.

"This is a sovereign decision by Spain."

Down the road, Spain could face sanctions.

The British, along with 11 other countries, have been championing the cause for growth.

They fought to have their ideas in the summit's conclusions. These include expanding the single market, deregulating and boosting trade. Prime Minister Cameron claimed the letter containing these ideas had dominated the agenda of the summit.

French President Nicolas Sarkozy was icily dismissive: "What a tribute this is to Europe - to send Europe such a lovely letter.

"Usually if you write a letter, signed by other friends, it's because it's important. You're either announcing that you're leaving, or saying you love someone.

"I take Mr Cameron's letter - after his decision not to join the treaty - as a sign that he doesn't want to get left behind and I'm delighted by that, because we need the British in Europe... perhaps not always!"

French question

This answer is a reminder that some of the old fault lines remain. The French do not necessarily support a great liberalising of the internal market.

And thrown into all this is the uncertainty of the French elections. If the Socialist candidate, Francois Hollande, wins then the German austerity drive will be challenged.

In London this week, Mr Hollande warned of the dangers of a Europe of austerity and high unemployment.

He told me: "If we allow youth unemployment to go up to 40 or 50%, what will we have?

"Either violence or riots. A break-up of families or an even bigger break-up of society. You'll have unrest like you had in Britain last summer or in France in 2005."

Even if the Greek bailout is finally agreed and private investors agree to take losses of more than 50%, doubts remain.

The Greek economy cumulatively has shrunk by 16%. Many officials still privately believe Greece will fail to honour its commitments and that the country will need either a third bailout or will be allowed to default.

So in Europe 'tis the season for optimism, but seasons pass.