They thought it was all over. It isn't. Europe's debt crisis remains toxic and unresolved, even as EU leaders meet in Brussels to back action that is supposed to restore the continent to good financial health.
Yesterday Moody's, a credit ratings agency, exercised irresponsible omniscience to downgrade 30 Spanish banks and warn Britain that cuts in George Osborne's budget may not be severe enough to sustain Britain's AAA rating, while Ireland reported that last year its economy had shrunk for a third year in a row. Yields on Irish government 10-year bonds peaked at 10.21% – which is market code for the rising risk of a default. To put this in context, Ireland, an independent nation still with a big economy, is now trusted less by investors than John Lewis, the British retailer, whose bond offer, at a much lower rate, was oversubscribed this month.
On Wednesday the Portuguese government collapsed after the country's parliament refused to back a fourth austerity package. In Brussels earlier in the week the police fired water cannon at protesters who feel that austerity is being imposed, without any democratic backing at all, to please the markets. Never before has the EU's political elite been so far apart from its citizens, or so fragmented. The notion of a common European home with common interests is failing as some states, such as Germany and Sweden, return to pre-crash rates of growth while others, Greece, Portugal and Ireland among them, remain broke. Even before the summit began, a draft of its conclusions was leaked. It suggests eurozone leaders have not worked out how to fund the proposed European Stability Mechanism and its €700bn bailout fund, which is supposed to sort out the sovereign debt crisis once and for all.
None of this means the EU is about to fall apart or the euro collapse, but it does pile on the pressure, particularly for Germany where Angela Merkel wants to renegotiate the terms of Berlin's payments into the fund. In the short term even the Portuguese situation is manageable. The markets had already factored in the probability of an EU bailout, along the lines of Greece and Ireland. But without a secure government in Lisbon it will be hard to agree or enforce the terms. Even Ireland, which does have a new government elected on a platform of implementing an austerity budget, is trying to renegotiate the terms of its EU aid: instead a further bailout looks more likely. By taking what was private bank debt on its shoulders the Irish state has made the country's task harder, since any default would be a national not just a commercial one. In Portugal and Greece, it was always the state that was doing the spending.
There seem to be three possible outcomes. The most likely is that the eurozone will somehow muddle through, at the cost of more bailouts to indebted states, and somehow a mix of growth and austerity will ease the crisis, at huge social cost in places such as Greece. Or some states could demand and obtain easier repayment terms – perhaps defaulting altogether and hoping to rebuild as Iceland is managing to do. But if that happens, their ability to borrow from anyone other than the EU will be shot through. Finally, the euro could collapse, its rich members taking one course and leaving the rest to go to hell in handcart. But that would effectively wreck the EU.
Of these the first is the most palatable option and the one EU leaders are sticking to. Even Britain, excluded from the eurozone core meetings, sees the advantages, which is why Eurosceptical David Cameron is saying so little. But what if the debt terms and enforced austerity prove so onerous that more governments fall rather than implement them? Perhaps some economies will never prove strong enough to crawl out from the commitments imposed on them. Britain is not alone in facing a hard choice between cuts, growth, debt and democracy.
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