Standard & Poor warning just makes Friday more critical

LIKE ME, you have probably lost count of the number of make-or-break meetings to save the euro that have been held since the crisis first broke eighteen months ago.

This time, though, things may be different. With Friday's Brussels summit fast approaching, last night's unexpected announcement by the rating agency Standard & Poor's that even Germany's AAA status is now at risk, underlined just how urgent the search for a solution to the Eurozone crisis has become.

Earlier in the day Chancellor Merkel had met President Sarkozy in Paris to hammer out what that solution might be. Under their 'Merkozy' plan, the 17 members of the Eurozone will have to accept tough new co-ordination of their budgets and borrowing. In return Germany will allow the European Central Bank to ease the pressure on the likes of Greece and Italy by buying up more of their bonds.

Unlike previous attempts to save the euro, at least this one addresses two of the three basic problems: the immediate lack of money to bail out members that cannot access the money markets on affordable terms, and the need for a credible framework to ensure financial discipline going forward.

What it does not do is set out how the Mediterranean economies can regain viability while they remain in the single currency.

Despite this significant omission, the odds are that Merkozy, or at least something close to it, will be adopted. Even Britain, the EU member most likely to prove awkward despite not being in the euro, appears to have been squared in advance – and not just by Sarkozy when he met David Cameron in Paris last week.
 
The word is that the Americans, in particular, have made it very clear to Downing Street that they expect the eurozone to sort itself out as a matter of urgency. Hence US Treasury Secretary Tim Geithner's flying visit to Europe today to "slap heads together". If the rest of the world thinks we are being awkward, it will not just be Paris and Berlin that make their displeasure felt.
 
But even if the Merkozy plan is approved, that is no guarantee it will succeed. The most obvious short-term flaw is that while the first part, fiscal discipline, will be enshrined in law, the second part, more leeway for the ECB to intervene, will have to be taken largely on trust. There is also the question of what Mario Draghi, the Bank's new Italian president, last week called "sequencing" – ie will it increase its bond purchases before the new fiscal framework is in place or only afterwards, which could take many months?

The markets could give the plan the thumbs down on either count, but that is not the only reason these questions are important. What is being proposed is very much in Germany's interest as the continent's principal creditor, but promises years of painful austerity for the debtor countries. If the euro is seen to be run for the benefit of one country or group, there will surely be more trouble down the line.

Nor is this just a problem for the euro's members. It also confronts David Cameron with an acute dilemma.

Fearful of the damage to the British and global economies should the eurozone collapse, he has publicly urged his fellow leaders to do whatever is needed to ensure its survival. But he also fears, with reason, that a new EU Treaty could split his party, fatally damaging his own chances of re-election in the process.

His preference would be a solution that involves only the 17 members of the eurozone. That way, he can hope to avoid having to put a new EU settlement before either Parliament or the British electorate.

But even if this happens, it will only buy him time in the short term. It would be far better to ensure, right from the outset, that any new system has the consent of all EU countries – debtors as well as creditors, those who are in the euro and those who are not.
 
If the revamped eurozone turns into a German stitch-up, it is unlikely to last and highly likely to end in tears. And if Tory backbenchers think the Prime Minister has done nothing to prevent it – or, even worse in their eyes, failed to win any concessions in return – the pressure for a referendum on the EU could become overwhelming.

On Friday, the rating agencies may be watching Germany, but his MPs will be keeping a beady eye on him. When he goes to Brussels, the PM needs to be ready to get stuck in. ·