It was after 1 a.m. on Monday May 10 when a little-known Dutch civil servant made the suggestion that may have saved the euro. European finance ministers had come together in Brussels late on the Sunday afternoon to thrash out a rescue package to stabilise the common currency. Unconvinced by a 110 billion euro deal for debt-laden Greece eight days earlier, the markets had knocked the euro 4 percent lower against the dollar in the intervening week and pushed bond spreads to new highs.
As the markets headed south that Friday, U.S. Treasury Secretary Tim Geithner had spoken to his European counterparts on an emergency conference call of G7 finance ministers and central bankers. "We need a clear, strong, unequivocal financial back stop," he said. President Barack Obama had rung German Chancellor Angela Merkel twice to stress the need for a headline-grabbing package.
With investors in Asia poised to start selling again in just a few hours, the ministers knew they needed to come up with a plan — and fast. "The atmosphere was like the end of the world," said a French diplomatic source who, like many officials who spoke to Reuters for this story, declined to be named. "It was a lot like 2008. We had our eyes on the clock because we absolutely had to have an agreement before the Asian markets opened. No agreement would have meant disaster, a major sovereign debt crisis."
There was just one problem: The ministers could not agree on what to do. Thirteen of the 16 euro zone countries, including Austria and Finland, traditional allies of Germany, wanted to allow the European Commission, backed by a euro zone guarantee, to raise money on capital markets and then lend it to member states in acute financial distress.
Germany, Europe's economic heavyweight, hated the idea. Finance Minister Wolfgang Schaeuble, in a wheelchair since a deranged man shot him at an election rally in 1990, had fallen ill on arrival in Brussels and been rushed to hospital. Interior Minister Thomas de Maiziere, a confidant of Merkel, had received a surprise call from his boss while taking an afternoon stroll in the woods, and had flown in from Berlin to hold the line on the loans idea. Anything more than coordinated bilateral loans from member states was unacceptable, he warned, and would be shot down as illegal by Germany's Constitutional Court.
An hour before the opening bell in Tokyo, the ministers took a short break. Some huddled with aides; others paced the halls talking on their phones or tapping out messages on their Blackberries. Spanish Economy Minister Elena Salgado, the meeting's chair, retired to a private office to call Prime Minister Jose Luis Rodriguez Zapatero to discuss new austerity measures.
It was then that Maarten Verwey, director of foreign financial relations at the Dutch Finance Ministry, floated the idea of a temporary Special Purpose Vehicle (SPV). Participants in the meeting said Verwey pointed out that an SPV could raise and disburse funds as needed but might also get around Germany's objections. A few German officials, including Bundesbank President Axel Weber, had hinted at such a solution in other meetings that night.
Verwey was dispatched to test the idea on the German delegation, which relayed it to Merkel, huddled in the Chancellery with a small group of senior cabinet members who were still digesting a major setback for the ruling coalition in a crucial state election hours earlier.
Yes, an SPV would be an acceptable solution, came the reply. Berlin liked it because it would be temporary (the Germans insisted on a three-year limit), it respected the unanimity rule, kept control out of the hands of the Commission, and avoided anything that might look like an embryonic common European bond or a permanent debt management office for the euro zone. As with aid for Greece, Germany had insisted on and won its wish for the International Monetary Fund to be involved.
With German backing assured, Salgado reconvened the ministers just before 2 a.m. to ratify the accord. Christine Lagarde, France's straight-talking economy minister, summed up the moment in a single word: "Hallelujah."
Hallelujah, indeed. A 750 billion euro deal to save the common currency and stave off a global debt crisis would have been unthinkable only a few months before. But that was before Greece's financial woes had exposed both yawning fiscal divergences within the euro zone and holes in EU budget rules designed to prevent the very kind of crisis that now threatens Europe's single currency.
As European leaders prepare to meet again on June 17 to map out a new strategy for growth and fiscal governance, it's worth asking what a revitalised, better coordinated, more strongly regulated euro zone would look like. Is a new model possible? Is the euro zone fixable?
TWO GREAT SHOWDOWNS
In private conversations with colleagues, Chancellor Merkel has described the intense market pressures of the past few months as a "poker game" between investors and politicians. Whoever flinched first, she said, would lose.
In Brussels, Europe raised the stakes. The rescue mechanism — a 500-billion-euro special lending facility backed by up to 250 billion euros from the IMF — was an implicit acknowledgement that Europe's existing tools to prevent a breakup of the bloc are woefully inadequate. But it was also a signal to investors who had openly challenged leaders to end the crisis.
Whether it will work or not is uncertain. Both the euro and the bloc remain vulnerable.
A separate showdown is also under way: a high-stakes slugfest pitting euro zone leaders and their competing visions of the currency union against each other.
In one corner — Germany and Merkel, the pastor's daughter from East Germany who stands accused of deepening Europe's crisis by resisting a quick aid package for Greece. She blames the crisis on a lack of fiscal discipline on Europe's periphery and wants a radical strengthening of EU budget rules as well as changes to the Lisbon Treaty to prevent such profligacy from ever happening again.
In the other corner are France and its hyperactive President Nicolas Sarkozy. He sees the crisis as an opportunity to usher in the euro zone-wide "economic government" Paris has long sought. In this Europe, the bloc's leaders, not its central bankers and finance ministers, would set economic policy.
The euro zone's struggle with the markets could well determine the fate of the ambitious common currency project. Europe's internal fight will shape the future of the continent itself. "The euro is Europe; Europe is peace on this continent," Sarkozy told journalists in early May, the flags of the euro zone's 16 members behind him. "We cannot allow what previous generations have built to be undone. That's what is at stake."
