Which magnificent edifice will crack first?

German Chancellor Angela Merkel Photo: Reuters

By which I mean, of course, the Euro or the Iron Chancellor? And there are not too many betting that Angela Merkel is about to back down, in the face of concerted pressure from inside and outside the EU, and open her chequebook to guarantee the overdrafts of the rest of the Eurozone.

Tonight’s ‘informal’ dinner in Brussels has suddenly been turned from a gentle ‘getting to know you’ session with the new-boy François Hollande, into a show-down summit with the future of the single currency at stake.

How did that happen? It’s the Hollande effect: he seems to be serious about making an impact on the European debate, and he wants that impact to be felt before his voters go to the polls again next month in elections for the Assemblée Nationale. A big win for the socialists in June will make the next four years a whole lot easier for the Hollande team in the Elysée.

Newly-elected French President Francois Hollande Credit: Reuters

Hollande is serious about the issue of Eurobonds, and he’s ready to confront Merkel head-on tonight. Nicolas Sarkozy tried this once, but gave up when he realised the Germans were not going to budge.

Hollande, invigorated by his fresh electoral mandate, and the support of Spain and Italy, and of many in the Commission in Brussels, and yesterday’s support for Eurobonds from both the OECD and the IMF, thinks he can succeed where Sarkozy failed. We’ll find out soon enough if he’s right.

The Germans have made a small, symbolic concession, agreeing to what are being called ‘project bonds’, where money will be borrowed in the name of the Eurozone as a whole to fund some limited cross-border transport and energy projects.

It’s being presented as part of the new ‘growth agenda’, but, and it’s a big but, they will only raise €230m, and this experiment will be a strictly limited one-off. In other words, the Germans are not allowing this to be presented as just the start of something much bigger.

On Eurobonds themselves, Berlin is absolutely intractable. They are categorically not about to use their own credit-worthiness to allow the heavily indebted Club-Med countries to borrow yet more cheap money.

There are several reasons: they believe this is what caused the crisis in the first place; they think that if they agreed, that would be the end of serious and painful reform in Southern Europe; that it would cost them a great deal more to borrow money themselves because their own credit-rating would suffer; that Eurobonds are specifically outlawed in the European Treaties; and last but by no means least, that German voters would kick out anyone who agreed to send their hard earned taxes to feckless Greeks, Spaniards or whoever.

That is quite a list of reasons to say no, and no is exactly what Chancellor Merkel is going to say tonight. Expect a Thatcher-esque performance of handbag diplomacy, from hors d’oeuvres through to petits-fours.

German Chancellor Angela Merkel welcomes French President Francois Hollande at the Chancellery in Berlin at the beginning of May Credit: Reuters

So where will that leave the Franco-German alliance in Europe, and more importantly where will that leave the Euro? The French newspaper ‘Le Figaro’ has a headline today proclaiming the end of the Franco-German ‘motor’ that has powered so much European integration. That is almost certainly premature, but if Merkel’s refusal ultimately contributes to cracks in the Eurozone, relations between Paris and Berlin could certainly suffer.

As to the Euro itself, it seems increasingly that only decisive German action, in other words the opening of the German cheque-book, is going to turn around the current debt-deflation spiral in Southern Europe. That is why bodies as august as the OECD and the IMF are coming off the fence and weighing into the debate, with strong signals that they want the Germans to act.

The question we still haven’t got an answer to is whether Berlin believes that a bill of hundreds of billions of Euros is a price worth paying to save the single currency? If the answer is no, we are in for some interesting times.