14 July 2014
Bad debts at Portugal's biggest bank sparked fresh eurozone jitters last week
This is a week which will decide some of the ins and outs - who will be the stars in the EU firmament.
It is a game played with some intensity. The nation states are all proposing names to be their EU commissioner - who gets what will tell us much about power and influence in Brussels over the next five years. And who becomes the President of the European Council and the High Representative for Foreign Affairs. But more of that tomorrow.
Tuesday should see Jean-Claude Juncker clear the final hurdle on his way to be enthroned as President of the European Commission, when the European Parliament almost certainly will back him.
But the Juncker era will not be defined by institutional struggles or who sits in what chair. It will be judged by whether Britain stays in the EU and - arguably more importantly - the health of the eurozone economy, which remains vulnerable to weak growth and high levels of debt.
Last Thursday there was a reminder that the eurozone crisis has not been cured. It is just no longer acute. Shares in Banco Espirito Santo, Portugal's biggest bank, were suspended after falling 17%. Troubles had been revealed in the bank's parent company.
What was interesting was not so much the bank itself - the government in Lisbon insists any capital shortfall can be met - but the nervousness of international investors.
For 24 hours nerves were frayed not just by the spectre of the banking crisis returning but by a raft of economic news which showed just how fragile the eurozone recovery is.
Bleak figures
In May industrial output in Italy fell 1.2%. It fell 1.7% in France. In Germany it has dropped for three successive months.
Portugal's debt-to-GDP ratio is heading towards 130% by the end of the year. Growth in Italy might just edge 0.6% this year but its debt ratio could hit 135% of output.
France is stagnating. Yes there are some bright spots - unemployment in Spain has edged down faster than expected - but in Greece, for instance, unemployment remains stubbornly around 27%.
What has happened? Investors believed European Central Bank President Mario Draghi when he said in 2012 that the ECB would do whatever it takes to support the euro. His promise has never been tested, but no one it seems is prepared to bet against the ECB.
Since then great walls of global cash have been scouring the world seeking out marginally higher returns. Nearly 600bn euros (£477bn; $816bn) has found its way into European equities and bonds. Greek banks and Portuguese bonds have become sought after.
Mr Juncker (left) and Mr Draghi are now key players in efforts to restore the eurozone to health
Bending the rules?
The faith of the investors has not been shaken, but there was a wobble last week, an anxiety that despite banking reform sovereigns could still be at risk, a worry that in some countries prices are falling and that the risk of deflation remains real.
Which takes us to politics. The Italian President Giorgio Napolitano made the point last week that if the young can't find work then Italy is finished. That in the end is the test: can the eurozone create jobs?
And that leads us back to Jean-Claude Juncker. Italy is campaigning for flexibility over the budget rules or as some would see it - how to borrow more money.
The Italian PM, Matteo Renzi, is arguing for more time to reduce his budget deficit while he implements structural reforms. Much to Mr Renzi's annoyance, the head of the Bundesbank responded with a warning shot against undermining the credibility of the EU's Stability and Growth Pact.
But Mr Juncker owes Italy and France. In exchange for getting some support for "flexibility" they backed the former Luxembourg PM for Europe's top job. He has already hinted that the key economic post in the next Commission - Economic and Monetary Affairs - will go to a Social Democrat and, most likely, a French commissioner, who may well support every bit of flexibility that can be found within the rules.
But unnoticed by those focusing on the British campaign against Mr Juncker is the emergence of a new struggle between those who believe, like the Dutch and the Germans, that budgets have to be brought under control within a certain time frame, and the Italians and French, who have resumed their arguments against austerity. This will be the first test for Mr Juncker - and jobs and the eurozone economy will define his presidency.
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