Europe: Dangerous eurozone limbo

Italian PM Mario Monti has German support for his tough austerity programme

The winding down has begun. The traffic is already lighter. The great European escape has started and in a couple of weeks the bureaucratic enclave of Brussels will appear evacuated.

The summer usually brings a pause to the eurozone crisis, although last year Italy was scrambling to find savings to make its budget more convincing. This year officials and leaders will hope for a respite, with the certain knowledge that the crisis will return in the autumn. Last week the Finnish Prime Minister, Jyrki Katainen, accepted that these were "dangerous times".

Greece remains unstable. The new government in Athens is struggling to find the extra savings that are a condition of receiving further aid. The three parties in the government are asking for more time to make the cuts, but its international creditors have lost patience. The head of the IMF, Christine Lagarde, said she was not in a "renegotiating mood". Neither are the Germans. Angela Merkel's spokesman Steffen Seibert, said last week that "neither the content nor the time-frame of the memorandum (the bailout deal) are up for debate".

The Greeks tend to forget their politics in the numbing heat of August, but the country remains trapped in a cycle of decline, with a shrinking economy and rising unemployment. The Prime Minister, Antonis Samaras, said only recently "we can't have people who had homes eating out of garbage cans, we can't have suicides increasing". The answers, however, remain elusive and the expectation is that Greeks, sooner or later, will return to the streets.

Grim belt-tightening

Most attention is being paid to Spain. It now has a tranche of money to help its banks, but the Spanish problems go much deeper. The country itself may still need a bailout.

The credibility of Prime Minister Mariano Rajoy has been damaged. Initially the rescue of the Spanish banks was presented as almost a technical adjustment. There would be none of the tough conditions that Greece had faced. Last week he had to announce a further 65bn euros (£51bn; $80bn) in savings; an increase in VAT and cuts to unemployment benefits and public sector wages. It did not go unnoticed how quickly the European Commission praised the move.

On the streets the - up until now - extraordinary patience of the Spanish is fraying. Analysts are sceptical. One said that "raising indirect taxes in Spain now is tantamount to economic destruction".

For the moment Spain, too, is caught in a cycle of decline that will test its commitment to the euro.

Ultimately Italy has always been the country that investors and European officials worry about the most. It is too big an economy to be rescued. Its credit rating is two levels above junk status. Its economy will shrink by 1.9% this year and will remain in recession next, whilst needing to raise the equivalent of 25% of its GDP just to service its borrowing needs. Its public debt is expected to reach 126% of GDP by 2013.

It could yet need outside help, although it has strengths that some of the other countries do not have. The head of the Bundesbank, Jens Weidmann, said that "if Italy stays the course on its reforms, it is on a good path". The Italian Prime Minister Mario Monti, however, knows the country is in a tough fight. He described it as a "a brutal war" - that probably cannot be won without growth.

In the meantime - despite the claims made for the last summit - the EU's northern countries are tiring of supporting the weaker countries of the south. In Germany there is a fierce debate among economists about whether a banking union will just result in Germany transferring more funds.

Simon Tilford from the Centre for European Reform summed it up in a paper like this: "Unfortunately, the agreed measures (at the summit) were modest and have already prompted a backlash in various countries, not least in Germany and the Netherlands. Indeed, much of what was agreed at the summit is unlikely to come into effect. All this suggests that the limits of the politically possible may already have been reached."

The temptation amongst European officials is to focus on institutions and structures. The future of the eurozone is more likely to be decided by the real economies. There can be no solution without growth.