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The Globe and Mail

Euro zone’s darkest hour is just before dawn

Two fine old traditions are returning to life in the European Union: the late-night summit and the last-minute deal. Only one detail is different. These days EU leaders haggle not in glamorous settings such as Nice, Rhodes and Seville but in the Justus Lipsius building, a featureless hulk in Brussels filled with hundreds of meeting rooms and 24 kilometres of corridors.

Next Friday's summit is predictably being billed as the best opportunity to save the euro since – well, since the last summit on Oct. 26-27. Listen to Olli Rehn, the EU's monetary affairs commissioner. Like many Finns, he is mild-mannered and gives the impression of being in total control of his emotions. But on Wednesday he said: "We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union."

The crucial words are "complete and conclude." Taken at face value, they raise expectations that the EU will find a definitive solution to the sovereign debt and financial sector crisis. But on Friday, Angela Merkel, Germany's chancellor, said her centre-right government was still of the view that the crisis "cannot be solved in one fell swoop overnight."

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What, then, is it realistic to expect from next week's summit? Roll back the years to May, 1998, and you will get an idea of how EU leaders bargain, bully and bluster their way to a deal. At stake 13 years ago was the nomination of the European Central Bank's first president.

Germany was keen on Wim Duisenberg of the Netherlands, an orthodox central banker trusted by the Bundesbank. But Jacques Chirac, France's then president, was having none of it. Seething with suspicion that other EU politicians and central bankers had conspired to pick Mr. Duisenberg without properly consulting France, he pushed the candidacy of Jean-Claude Trichet, the French central bank chief.

After much hot-tempered negotiation, EU leaders struck the deal in the early hours of the morning. Mr. Duisenberg would serve half of his eight-year term and then retire on grounds of old age, handing over to Mr. Trichet. Seasoned summiteers joked that the ECB's first president would be "Jean-Claude Trichenberg."

The May, 1998, summit offers two lessons. One is that compromise is the essence of EU deal making. It can hardly be otherwise in a union of 27 states that have only partly pooled their sovereignty.

Consider how the euro got its name. The French at first wanted to stick with the ecu, the EU's monetary unit in the 1990s. But the Germans grumbled that the word reminded them of a Bavarian beer called Eku. Eventually everyone raised a glass to the euro.

The second lesson is that EU compromises often take a shape that few predict before the summits. Do not be surprised if this happens on Dec. 9 in Brussels. After all, when EU finance ministers met one Sunday evening in May. 2010. to respond to a rapidly intensifying emergency in sovereign debt markets, no one quite knew what they were going to come up with. The final deal involved a quid pro quo: the EU and the International Monetary Fund would set up a €750-billion safety net for stricken euro zone governments, and the ECB would buy sovereign debt on the secondary market.

This time something similar is in the air. Germany, France and the other 15 euro zone states will solemnly promise perpetual fiscal discipline. This will involve stricter procedures for debt and deficit sinners and may one day form part of a rewritten EU treaty. Meanwhile, vulnerable countries such as Italy – now back in favour after the professorial Mario Monti replaced the mercurial Silvio Berlusconi as prime minister – will pledge themselves to rigorous measures to control debts and deficits in the short term.

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In return, the ECB will take prompt action to protect the banking system and governments threatened with rout in the bond markets. It is also highly likely that the IMF will chip in. Emerging powers with large current account surpluses such as Brazil, China and Russia may increase their IMF contributions, a step that would permit the fund to boost its assistance to Europe.

But the IMF's probable involvement provides one reason not to expect a comprehensive solution to the crisis from Friday's summit. The Brazilians, Chinese and Russians are not minded to give Europe a free lunch. They want more influence at the IMF. This will mean reforming the quota system that determines the voting powers of IMF member states. It will take time to sort out.

Whether there is enough time left to rescue the euro is uncertain. But most of the world has a strong interest in saving a project that defines Europe's commitment to closer integration. Even the U.K., rarely enthusiastic about the euro, knows it. The Conservative-Liberal Democrat coalition government this week extended its austerity program beyond the next general election, due in 2015, and acknowledged that a euro zone collapse would expose the British economy to grave danger.

Sharon Bowles, the U.K. politician who chairs the European Parliament's Economic and Monetary Affairs committee, framed the issue on Friday in the starkest terms. "We are potentially facing the demise of the euro by Christmas and, if that happens, it will wreck our economy," she said.

Arguably, the real question is not what EU leaders may or may not decide on Friday. It is what may happen in financial markets. A big bank failure, a run on deposits, a bond market strike – any of these events could shatter the euro zone. EU summits once provided ingenious fixes to difficult problems. But this time a summit is unlikely to be enough.

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