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On a spring evening, a group of the world’s most powerful policymakers sat down to dinner at 501 Pennsylvania Avenue. The building, in the heart of the US government district, is a blend of modernist and neo-classical styles termed playful by some architecture critics. But the subject under discussion was deadly earnest: how to save Europe’s monetary union. On the minds of the finance ministers and central bankers from the Group of Seven advanced industrial countries around the table was the risk that Greece’s sovereign debt troubles would explode into a wider European crisis and destabilise the global financial system.
“You can’t overstate the fact that America, with increasing incredulity and anxiety, was watching Europe’s inability to act,” recalls Alistair Darling, the former UK chancellor, present that night. “The message was, ‘Why can’t you take action? You know you’ve got to do something.’”
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Very serious concerns were expressed about the danger of global contagion. There was very straight talk,” remembers Olli Rehn, European Union monetary affairs commissioner. “It was clear that the US and IMF would lend support. There was no American schadenfreude. They were supportive and ready to help with their experience of crisis management.”
.Almost six months on, it is clear that they acted in the nick of time. Numerous and extensive interviews with those at the heart of the emergency reveal how close the single currency came to collapse – and the extent to which the rescue of the ultimate expression of European integration depended on outsiders in international institutions and the US administration
And with bond markets displaying persistent concern about the economic and fiscal outlook for eurozone members such as Ireland and Portugal, not to mention Greece, the lessons of April and May are more pertinent than ever. They suggest that, though Europe’s decision-making procedures can appear painfully slow, its leaders will do whatever it takes to keep the euro alive.
By Sunday May 2, the bill for rescuing Greece had risen to €110bn, with €80bn to come from the eurozone, €30bn from the IMF. But as panic spread across world financial markets over the next five days, threatening to engulf Ireland, Portugal and Spain, EU leaders were forced to produce a second plan of once unimaginable size: a €750bn backstop fund for the entire 16-nation eurozone, backed by an unprecedented ECB initiative to buy government bonds.
Using a chart that illustrated how financial markets were driving interest rates on the bonds of weaker eurozone governments to unsustainably high levels, Mr Trichet announced that the crisis was no longer limited to Greece. One participant recalls: “Trichet said: ‘This isn’t only a problem for one country. It’s several countries. It’s Europe. It’s global. It’s a situation that is deteriorating with extreme rapidity and intensity.’”
His remarks had the desired impact. Leaders of smaller eurozone countries not fully plugged into world financial markets had, until this moment, not appreciated the gravity of the crisis. But even more experienced leaders appeared stunned. One EU ambassador remembers looking at the French president after the dangers had been spelled out. “[Nicolas] Sarkozy was white with shock. I’ve never seen him so pale,” he says.
“The British position was not very constructive,” says Anders Borg, Sweden’s finance minister. “The British could pay a price for this for some time to come. At such a sensitive time, to make such a drastic statement was not very wise, and it will not be easily forgotten.”
Nevertheless, EU leaders had succeeded – at the last possible moment – in buying themselves some time to restore order to the eurozone.
FT.com / Comment / Analysis - The euro: Dinner on the edge of the abyss
Extraordinary.