There are tentative signs that the dust is beginning to settle after the last few hyperactive weeks, with signs that world leaders have mounted an effective response to the credit crisis. Inter-bank lending seems to be recovering, stock markets appear more stable and the outline of a global approach is beginning to show, following three weeks of frantic decision-making at national, European and at global levels.

As so often happens, it is the force of this crisis which is driving Europe forward. The EU landscape has changed in many ways in the last three weeks.  Its political position has been strengthened. There is no question that President Bush’s invitation to Presidents Sarkozy and Barroso to dine with him in Washington last weekend and their joint commitment to a series of global summits must mean that the EU can now claim a real voice in international monetary affairs.

The crisis may be labelled “Made in America”, but its repercussions across the world have made a pan-European approach essential.  Never have the implications of globalisation been so clearly demonstrated. Any unilateral country-by-country response, such as the Irish and German proposals on deposit protection, met with a storm of protest.

One curious consequence of the crisis is the transformed relationship between the eurozone and the UK. We used to argue that Britain should adopt the euro lest the UK be excluded from the Eurogroup of countries and so lose influence.  How ironical, then, that Gordon Brown should be invited to attend the euro summit on October 12 and become the hero of the hour, transformed into Flash Gordon with his (or rather Chancellor Darling’s) three point model for underwriting inter-bank lending, recapitalising the banks and protecting savers. Brown even takes his place in the family photo of the 15 eurozone ministers!

You could argue that it was precisely the UK’s independence of the euro which made the UK’s actions possible, but taking these drastic measures if everyone else was doing nothing would have been highly risky for the Brits. Incidentally, I wonder how much liquidity the UK’s major banks have received from the ECB since this crisis began. There’s even more interdependence here than meets the eye.

Of course the eurozone’s response to the Brown plan had to be political rather than legal, relying on common commitments and national measures rather than new EU legislation. It is only national governments which have the resources and the legal power to underpin their banks’ capital base.

The attention must now shift to the legislation to be adopted across various institutions to avoid any repetition of the crisis.

The Commission has already put forward a new proposal to safeguard depositors up to €100,000 per person, replacing the current €20,000 limit. Will this apply in Iceland, I wonder, under EEA rules?  Stronger regulatory measures have been proposed for banks and insurance companies and guidelines on state aid for guaranteeing deposits and bailing out banks have been issued by the Commission. President Barroso is emerging from the crisis with much credit – I would think his place is secure if he wants to serve a second term as Commission President.

The issue of bank regulation will be hotting up. Will central banks be given more responsibility? The British are certainly talking about it in relation to the Bank of England, and the subject will be on the agenda of the coming summit meetings in the context of post-Bretton Woods. For the eurozone, that must mean more responsibility for the ECB.
The crisis has triggered some interesting political developments. Take the Lisbon Treaty, for instance. Brian Cowen, The Irish Taoiseach, is committed to presenting the December EU summit with proposals to reverse Ireland’s rejection of the draft Treaty.

Mr Cowen argues that the EU has saved Ireland from a financial meltdown similar to Iceland’s and hopes that the Irish voters will appreciate this. He says that had his country not been part of the EU and the eurozone and without the support from the European Central Bank (about €70bn apparently) it could never have weathered the storm.

The Irish leader clearly hopes that this experience, plus reassurances on sensitive issues such as abortion and defence, will be enough to obtain a “yes” vote in a second referendum. The pressure is certainly mounting as the June deadline for European elections comes closer.

This will coincide with more straitened economic times as recession bites, public spending rises and jobs are lost across Europe. Things are far from returning to normal, and as someone said, the new normal will not be the old normal.

Just a week ago I suggested that continental Europe seemed rather detached from the global credit crisis.  Whoops! What terrible timing!

In the last seven days Europe has been hit by the storm force winds of this crisis. Liquidity has dried up, governments have been forced to rescue one institution after another, Iceland’s banking system seems close to meltdown, the Irish, the Greeks and the Germans have promised open-ended guarantees for bank deposits and the European Commission has been left floundering as the cry of sauve qui peut echoes across the EU.

Even Peter Mandelson has been brought back to London to shore up Gordon Brown’s war cabinet.

The Paris meeting of the Big Four was a show of solidarity but little more. The participants looked forward to tighter regulation in the future, but offered nothing at an EU level to cope with the current crisis.

It is only the state aid rules which have offered any sort of EU framework for national measures and several banking mergers and bailouts have been rapidly approved.

Deposit guarantees are a different matter. Commissioner Neelie Kroes fiercely attacked the Irish government for failing to discuss its guarantee scheme with Brussels in advance. It seems that she has made some progress concerning the detailed application of the scheme but not in the fundamental principle of an open-ended guarantee. The Brits and the French may now be forced to introduce similar deposit security, especially if the Germans go ahead, but the taxpayer liabilities are formidable.

It all demonstrates the massive cross-border implications of such measures. Inside or outside the eurozone, Europe must find ways to work more closely together in tackling the crisis.

While the United States and Britain reel from one catastrophe to another in the storm of the sub-prime crisis, the eurozone has seemed remarkably detached, until recently anyway. For the Americans and the Brits the news is totally dominated by stories of collapsing banks, bail-outs, vast lines of credit insurance which turn out to be no insurance at all, and an American administration desperately seeking a safe path for the US economy over the quicksands of collapsing confidence.

I’m not saying that the Land of the Euro is immune from the impact of this crisis – it clearly is not. The turbulence over Fortis Bank, to name but one of the repercussions, deepens the black hole for the missing Belgian government.

But there does seem to be a difference. The US and UK economies are so much more dependent on their financial services sector than most of the countries of the eurozone. What’s more, the great bubble of house prices linked with high mortgage commitments brings this crisis straight to everyone’s front door in Britain and America.

Maybe the continental reaction is also different because the power centres of the eurozone are so widely dispersed. It’s not like London or New York/Washington where the various regulatory institutions are perceived to work closely together. The European Central Bank from its fortress in Frankfurt is responsible for providing liquidity for the banking system across 15 countries; the framework for EU financial services regulation across the EU is crafted and overseen by Brussels; and individual member states have their own particular responsibilities for applying the rules, such as the clamp-down on short selling.

It’s striking to see how different players are reacting to the crisis. In the UK there may be talk of international co-operation, but the British government makes no mention whatever of the European legal framework, although it is evident that most of the legislation governing the solvency of banks and other financial bodies and the activities of financial services firms derives from EU decisions.

As for continental reaction, note the contrast between President Sarkozy and Charlie McCreevy, Commissioner responsible for the financial services sector. The French President is determined to push for more regulation and reserves particular venom for ratings agencies.

The Commissioner, by contrast, is keeping a low profile. He doesn’t like interfering with markets and plays down the need for drastic action on the regulatory front. He has even said that (unregulated) hedge funds and private equity should not be “tarred with the same brush” as the regulated sector.

Nonetheless, McCreevy must be seen to act, and sure enough the Commission is expected to come forward this week with some new proposals tightening up banks’ capital requirements in relation to securitised debt, although according to reports he has been persuaded by the banking sector not to go too far. Rating agencies will also face registration requirements, though short of the controls which the French and Germans would like.

The German finance minister Peter Steinbrück believes that the US will cease to be the global financial superpower following the credit crisis. He blames Washington for its failure to introduce stricter regulation despite European demands and has told journalists that in ten years time “we will see 2008 as a fundamental rupture”.

Apparently the Minister was particularly stung by the actions of a state-owned bank, which earned the soubriquet of Deutschland’s Dümste Banker from Bild Zeitung after it transferred €350m to Lehman Brothers two hours before Lehmans folded. Steinbrück is pushing for much tougher regulatory measures than McCreevy envisages.

After the Enron and WorldCom crises the US introduced Sarbanes-Oxley, a complex set of rules and red tape which many now see as over-reaction. Policy-makers now face another challenge – of preventing the excesses which produced the credit meltdown from ever recurring.

The Commission’s proposals will be a first step for Europe, although getting even such modest measures through Council and Parliament will be tough, given the impending European elections in June 2009. Maybe, though, this will be the opportunity for the EU to take the initiative in establishing a worldwide framework of regulation which does not throw Baby out with the Bathwater.

“That’s the only cut this year!” quipped a council member when European Central Bank president Jean-Claude Trichet took the knife to the ECB’s birthday cake in Frankfurt on June 2. The occasion was the tenth anniversary of the Bank’s establishment. Apparently the mood in Frankfurt was of genuine celebration tempered by concern at the conflicting challenges which the Bank currently faces over inflation and growth.

It has been a long journey since June 1998. It’s strange to think that the decisions on who would join the euro zone were taken under British presidency in May ‘98. In the chair was Prime Minister Tony Blair, who had won a landslide election just twelve months earlier. He had to praise the significance of the euro, although he had decided against taking Britain into the new currency, a decision regarded by many people as one of his biggest failures given the strength of his position, and no doubt strongly influenced by Gordon Brown at the Treasury.

The most interesting drama at the time was over the ECB presidency. President Chirac demanded that Trichet, who was then governor of the Bank of France, should be ECB president, whereas Wim Duisenberg from the Netherlands was the consensus candidate.

The crisis was resolved with a classic fudge. I will be far too old to serve two terms as ECB president, said Duisenberg, but any decision to resign “will be my decision alone”. There was, however, an understanding that Trichet would take over once Wim had taken that his solitary decision. Chirac conceded. Relief all round.

When the French president pressed for Trichet’s appointment in 1998 he no doubt hoped that a more relaxed French regime would prevail over Germanic discipline, setting interest rates with an eye to boosting growth. In the event Trichet has staunchly defended ECB independence and its key mission: to fight inflation.  Trichet’s own appreciation of the ECB’s role, its record and the tasks ahead was summarised in his Frankfurt birthday speech.

The record of the ECB has surpassed expectations. Its handling of the sub-prime crisis since last August has impressed everyone and the euro continues to strengthen its position in global markets – as well as appreciating in value. It now accounts for around 25 per cent of foreign currency reserves across the globe and we can expect that to rise steadily. China, for one, is keen to increase its euro holdings.

May 1998 marked the creation of the Euro Group of ministers.  This group of 11 countries was expected to become a potent force in European politics and it was Britain’s exclusion from the club which many of us thought would be the biggest penalty for not joining the euro zone.

I can’t say it has turned out like that. For a start, total disregard of the Stability and Growth Pact by some of the biggest members caused deep divisions within the group. Not much solidarity there!

There has also been real divergence in the performance of the euro zone economies, both in terms of their growth rates and their inflation. Maybe the interests of the euro zone countries (15 of them now) are so varied that they will never be able to take common decisions on such issues as international exchange rates and the value of the euro, economic management or taxation policy. President Sarkozy, for instance, has called for a cut in certain VAT rates across the EU to put the brake on rising prices, but his finance minister Mme Lagarde got short shrift from colleagues when she put forward the idea at the recent Frankfurt meeting.

On the international front the Euro Group president, Luxembourg’s Juncker, has bemoaned Europe’s failure to speak with one voice in the IMF. The question is, what should the voice say? A high level delegation to China was hyped as a first example of euro diplomacy, but it does not seem to have amounted to much. Maybe that could be a role for the soon-to-be-named Council president – provided he/she comes from a member of the Euro Group. 

I see that Slovakia will be the next country to adopt the euro, as of January 1 2009, when it abandons the koruna. It has revalued its currency in advance as an anti-inflationary move. Political opinion in Denmark continues to move in favour of membership. A referendum would of course be needed, and Sweden is publicly stating that a positive Danish vote would open the way for Sweden to consult the people as well, at the earliest in 2011.

Which leaves the United Kingdom. Willem Buiter, former member of the Bank of England’s Monetary Policy Committee is in no doubt. In his view Britain should join now. The FT’s Martin Woolf strongly disagrees.

Buiter refers to the enormous external liabilities of the UK’s financial services industry – €400bn in foreign currencies in his estimate, which is four times the country’s GDP. The Bank of England, he maintains, could never act as lender of last resort for such liabilities. Joining the euro and depending on the resources of the European Central Bank is for him the only way to defend the UK from an Iceland situation, where vast liabilities have accumulated in proportion to the size of the domestic economy.

It’s a bit tough being compared with Iceland, but it does focus on some of the issues raised by the sub-prime banking crisis and the new perceptions of risk that we have to live with. But probably the biggest test for the ECB over the next 10 years will be how far the euro zone can handle its own internal tensions and the divergence of its national economies.

It’s goodbye to the Cypriot pound and the Maltese lira, so who’s next for the eurozone?

What joy for travellers when the euro took over from 11 national currencies just six years ago! Gone was that muddle of francs and deutschmarks and lire and punt in our wallets, and all those old envelopes full of foreign change in the dressing table drawer. Suddenly all we needed were euros and the British pound.

The euro has been a remarkable success story. Its adoption by Cyprus and Malta from January 1 2008 brings the number of member states in the eurozone to 15 – a population of 318 million in a zone stretching from Finland to the mid-Med and from Ireland to Slovenia. It’s goodbye to the Cypriot pound and the Maltese lira.

I do like the design of the new coins – a beautiful Maltese cross, a shield and a prehistoric temple for Malta; and for Cyprus a 3,000 year old figure looking curiously like a Christian symbol one thousand years before its time, a 4th century BC sailing vessel and a pair of moufflon sheep. Cyprus’s coins have the island’s name in both Greek and Turkish. Maybe that will open doors on that divided island!

So who’s next for the eurozone? Slovakia is aiming for January 2009. Of the other non-euro outliers I could imagine the Danes joining within two or three years following their recent elections. Sweden is more doubtful and for the Brits we must be talking at least 10 years, if ever, given the state of British public and political opinion (see below).

Others are lining up: Estonia, Latvia and Lithuania are in the ERM; Bulgaria, Hungary, the Czech Republic, Poland and Romania are still working to get their economies in order.

For general background on the euro area see this page of the Commission’s website.

This year will be a testing one for the euro. As the economic background becomes more difficult, so politicians will want lower interest rates and a weaker currency, but the ECB is more concerned with inflationary pressures as rising oil and commodity prices push up costs.

ECB President Trichet has made it clear that fighting inflation is the priority for Europe’s central bank even if the Americans cut their rates to support the US economy. And of course a strong currency does help to contain dollar-denominated price increases.

The impact of a strong euro on particular industries is dramatically illustrated by the plight of Airbus, faced with direct competition from Boeing. Back in November CEO Tom Enders didn’t mince his words when he talked of “tremendous losses” for the company as the dollar continued to fall.

The situation has not improved since then. By the way, I thought it interesting that the Airbus boss was not complaining about the level of the euro, but underlining how the business itself must adapt.

Divergence between national economies may well put more strain on the eurozone, as the collapse of the housing market in Spain and mounting public debt in Italy threaten serious tensions. Indeed one major French bank warns that the interest rate spread for euro bonds might diverge significantly according to the country of issue, with the Italian and Spanish governments penalised by the market by having to pay much more for their borrowing.

We’re back to the old question: can the eurozone survive on the basis of “one policy fits all”? It has done so up to now, but there may well be speculation of members being forced to quit the euro. “No coincidence that all failed currency unions were abandoned during times of economic stress” says BNP-Paribas.

The estimates of growth for Europe’s economy are being revised down but there are reasons for some optimism. I’ve seen a timely reminder of just how important the member countries of central and eastern Europe, together with Turkey, the Middle East and Africa have become in maintaining momentum in the EU15’s economy. “Europe’s got its own China next door” says the author, Joe Quinlan from Bank of America. He sees the buoyancy of these emerging economies, both inside and outside the EU, acting as a powerful driver for Europe’s economy.

Talking of China, London’s Chatham House and the Robert Schuman Foundation have undertaken an audit of the views of Chinese policy-makers towards the EU. It is on the whole positive, but set in a long-term strategic context. One is reminded of Mao’s comment when asked what he thought of the French Revolution. “Too early to tell” he replied.

The latest Eurobarometer results give an idea of what Europeans think of the EU. It’s striking that across 27 member countries support for membership remains at its highest level since 1994, with 58 per cent seeing it as “a good thing”, against 13 per cent seeing it as bad. .

The Netherlands is way up – 79 per cent of the Dutch approve of membership, just three years after that negative referendum vote, as do 74 per cent of the Belgians and the Irish. The UK is bottom, at 34 per cent approval, with the Austrians at 38 per cent and the Latvians on 37 per cent. Nowhere do those who disapprove of membership outnumber those who approve.

Some of the most intriguing findings relate to trust. The pollsters asked respondents whether they “tend to trust” the European Commission. Across the EU one in two said yes, 26 per cent no, and 24 per cent were undecided. The Greeks at 69 per cent and the Belgians at 67 per cent felt especially trusting. France and Germany are around the EU average.

In the UK, on the other hand, only 22 per cent said they tended to trust the Commission and 47 per cent did not – far more negative then anywhere else. I can only suppose that this reflects the europhobe hostility of much of Britain’s national press.

But just as intriguing is the view that people take of their national politicians. Across the EU only 34 per cent say that they tend to trust their own governments, while 59 per cent do not trust them. In the UK 30 per cent trust their government and 34 per cent their Parliament, from which you might conclude that the British do not trust political structures wherever they may be.

For some eastern European countries like Bulgaria, Czech Republic and Romania the level of trust for EU institutions is around 60 per cent or more; for their own governments and parliaments around 20 per cent or less. The national political class is certainly finding it difficult to build confidence among voters in many parts of Europe.