21/10/2011 Newsnight

In the next 48 hours, the biggest economic crisis for a generation is

supposed to be solved. The Chancellor is calling the eurozone

talks critical. Like a rainbow, the nearer a deal gets, the harder it

is to touch, no sign yet of a pot of gold. In private Germany and

France talk about a solution in the summit after this one. Global

markets have rallied, despite what looks like a shambles, now Paul

Mason has more bad news. I have seen a European Commission

document that says unless the banks lose more than half the money they

have lent to Greece, the European taxpayer could be on the hook for

half a trillion euros. We will ask if the eventual deal will be dead

on arrival. Meanwhile: No, no, no. Deja vu all over again, are the

Conservatives really arguing about Europe? A Tory rebellion demanding

a referendum on EU membership is growing. This will be the worst

time to start having some arcane institutional debate about what

might happen in the European Union in many, many years to come. We

have a firestorm to deal with right now. Danny Finkelstein tells story

MP, Douglas Carswell, why he's Good evening. The euro-authorities

have tonight agreed to release eight billion euros to Greece, the

latest tranche of their bailout. The bed time reading will be the

stuff of nightmares. In a report seen by Newsnight, the European

Commission is considering a prososal to impose 60% losses on

the banks banks that lent to Greece, and warning that it will take half

a trillion euros to bail them out. The The document I have is the

European Commission's debt sustainability analysis, going into

the summit this weekend. It is dated tonight. What it says is

since July Greece has taken a turn for the worst. It says the economy

is adjusting in Greece through falling wages and prices rather

than structural, reform-driven productivity. Instead of the 21%

loss the banks were going to take under Greek debt, they will have to

take a hit of 60% of what he lent to Greece. We have a graph - they

lent to Greece. We have a graph to show how the European Commission is

thinking. That scenario is what they thought would happen to Greek

debt. It would peak around 170% of GDP and fall back. There is another

little line I hope we can animate that shows, with the haircuts, with

the losses of 20% to the banks, it is a little bit better. This is the

new baseline, the next line I will show you is the new baseline that

the European Commission is thinking, debt peaks at 186% of GDP and falls

back, much, much more slowly. There is worse. In this document, because

it is a scenario document, they consider something that might

happen, that is, that the Greek economy adjusts very rapidly. What

I have just said is it is adjusting really slowly. Were they to do

wages drivedown, pensions drivedown, growth collapses, they have

modelled the impact of that and say that it will cost 551 billion euros.

That is a combination of what comes from the banks and the European

taxpayer, unless we sort it out. That kind of figure, to be throwing

it around in an official document, whatever we think about it, is mind

boggling. You keep using the phrase "a scenario", are they trying to

scare us with this? I think they are. It is not us they are trying

to scare. There is a disagreement. The European Central Bank says it

disagrees with concluding scenarios, it doesn't want to scare anybody.

But there is an argument going on at the highest level of Europe,

what they are saying, it is a clear message, that last most scary

shock-doctrine says to the Greek Government, do not kid yourself

that you are imposing anything like a sustainable or structural change

on your country. All that is happening in your country is you

are imposing a kind of death spiral. We need, quite quickly, for the

European leaders to decide what they will do about that.

We will take that on in a moment. This weekend was meant to be the

time it all fell into place, a series of rolling summits ending on

Sunday night with a comprehensive agreement on how to solve the

crisis. Everyone knows that won't happen. At the centre of this

deadlock, France and Germany, the two biggest actors at the table,

their indecision sparked by their own domestic baggage has created

the impression of a shambles at a time when Europe can ill afford one.

We have been exploring how far apart the two sides are. In the

famous cartoon of the young Belgian detective, Tin Tin, and his trusted

champion Snowy the dog, go in search of a mythical ship called At

Unicorn. Just as Angela Merkel and Nicolas Sarkozy are searching for

an improbable solution to the euro crisis.

So what sort of solutions might be drawn up? With strikes and riots on

a weekly basis in Athens, it seems inevitable that Greece simply won't

be able to repay all its debts. In July there was talk of a 21%

haircut, now there is talk of those who lent money to Greece getting

50% or 40% of their money back. If the Greece get a massive write-off,

why not the Portuguese or the Irish, who have reformed their ways.

Default on one's debt is an enormous disruption to an open

trading economy like our's. We believe in rebuilding our economy

based on export-led recovery, we do not see default as an approach that

would have any relevance to Ireland. In advance of any Greek haircuts,

Europe urgently needs to fortify the banks. The IMF has suggested

all European banks, including potentially RBS in Britain, need

around 200 billion euros of new money to survive a Greek default.

But the European banking authority says they may now only need an

additional 80 billion euros. The last key element to avert the

process is a beefed up fund, the ESSF, there is 440 billion euros in

the pot, the idea is to leverage to get larger amount, up to two

trillion euros. That sounds a lot, but it isn't, especially since a

third has been alloted already to Ireland, Portugal and Greece.

Assenor politicians pack their bags for the hotel Switzerland, one

senior banker wondered sweeths, and one senior banker wondered who the

point was. French banks owe hundred 4000 billion euros in Greek debt.

Those banks will need substantially more capital from Paris. The

problem facing Mr Sarkozy and the entire eurozone, is recapitalising

the banks could jeopardising France's Triple A rating which

threatens the ESSF. The French and germs have two different opinions

on how the fund should be used. French are looking at the EFSF r as

a bank to be used, and the Germans as an insurance policy, to be used

in the event of the need. If they can spoof or demonstrate to the

markets there is sufficient resource here to deal with any

problems, ultimately what they hope is it will be l never be required.

- It will never be required. It was purely as an insurance product.

They knew they have the balance sheet to do it, but they hope they

don't have to do it. Another German dilemma is the tiny matter of

democracy, the German electorate is again supporting bailing out

profligate nations, and a constitutional court ruling means

the Bundestag now has the last say on any eurozone deal. If Germany is

to be the lender of last resort for all of the eurozone, it could give

the unwanted impression of a greater Germany, created

economically this time. But Germany isn't totally on its own in this

debate. We understand the Germans 100 persons, and to be very frank,

the German situation mirrors the Finnish situation. We think we had

a certain deal in the Stability and Growth Pact. Some countries have

violated the rules of the euro, it is extremely frustrating. We need

to do two things, one, solve the on going crisis Greece, and have much

tougher rules for the future, which means more European integration so,

this doesn't ever again happen. there is no deal over the next few

days, then the least worst case scenario would see markets

accepting that Governments would repay all their debts. The voting

public accepting a drop in their living standards, banks accepting

lower profits and bonuses and Governments accepting the meddling

of Brussels and or Frankfurt in their bugetry affairs. For many

people that is accepting the unacceptable.

The cataclysmic outcome would be a sudden and uncontrolled default,

collapse of the eurozone, and instant global recession, which

might feel like a depression. But as Tin Tin fans will tell you, the

solution to the mystery was eventually found not at sea, but

right under their noses. Captain Haddock's, to be precise.

With us Holger Schmeiding, chief economist at the German bank,

Louise Cooper, the senior financial an cyst at BGC Partners, and from

Brussels, the EU correspondent for the economist, Anton La Guardia.

Anton, I will start with you. You have come straight from the talks.

Give us a sense of the mood there? The mood is rather dejected, I

would say. You have a market panic going on. And you also have a

political panic, the two don't reconcile very well. So, you have

got markets that want to see where the money is, and are they going to

get paid back. And you have got Governments that reluctant to show

them that much money, because they fear they will be cheated, for

example the Germans, and you have the French not able to put up much

more money. How would you describe the relationship at the moment

between the German and French players? They have been probably at

the worst that we have seen in the past year, since they reached a

deal that annoyed everybody else in October last year. For the past

year or so, Mr Sarkozy has been very careful to be seen to agree

with Angela Merkel, and it has come to the point now, or the situation

is so bad, that they are at loggerheads, and when officials saw

the two of them in Frankfurt for the leaving party of Jean-Claude

Trichet, the head of the European Central Bank, they were taken aback

by quite how bad things were. Remember only a few days earlier

the two had stood side by side, saying how much they agreed with

each other, and how they were going to produce this comprehensive

solution, this global and durable solution, and all they were doing

is masking the disagreement between them. It doesn't seem to be

resolved tonight. Holger Schmeiding, how do you get round this, this

seems impossible? It seems difficult, but remember we have

been through similar situations before. In the end typically

Germany and France do agree. Both sides know they don't have any

other option in Europe. The two sides have to agree. It is highly

likely that by Wednesday, probably not by Sunday, but by Wednesday,

they will agree, and if they don't agree which Wednesday, they will

agree by the Sunday afterwards, on a joint proposal, how to get Europe

out of this. They agree that they have to get Europe out of it. They

don't agree with the means. Why should the deadlock suddenly be

broken, when they are going in completely different directions?

Because they know that markets would otherwise take Europe, the

eurozone apart. I'm fairly certain they will agree, probably by

Wednesday, the key question will be whether the agreement will be a

good one or a bad one. A durable or not. But I'm very certain there

will be an agreement, and probably mostly along the German lines,

which is the European rescue fund is turned into an insurer and not a

bank. Do you think, Louise Cooper, that

the Germans must win out on this one? The credibility of the ECB,

not least, at stake here? It is interesting that we spend so much

time talking about this bailout fund, the ESF - EFSF, a lot of the

politicians problem is coping with the crisis not solving the problem.

The bailout fund is throwing more debt at the problem in the hope of

alleviating short-term pain. It is buying us time, it is not dealing

with the three underlying problems. Which is the eurozone is

structurally flawed, that there is just too much debt, the eurozone

Governments have too much debt, and we're having trouble growing. We

need growth to get us out of debt. You can't even get on to the

underlying problems until you have sorted out what has happened at the

moment, you have seen what is happening in Athens and people are

dying? We are not close to dealing with the structural reform, getting

on top of the growth, the whole creation of the fiscal union, we

are miles away from it. We are having arguments about the

temporary solution to alleviate the short-term pain. This is kind of

where we are. I want to be optimistic, I think the political

class are kind of failing us. that I would love to disagree very

much. We have a very serious crisis to deal with. If we look beyond the

crisis at the underlying fundamentals, remember the eurozone,

so far this year, has been the fastest-growing of the western

economies. It has, by far, the lowest fiscal deficit of the

western economies. So the eurozone has a very dangerous crisis. But if

it can resolve that, the underlying fundamentals are much better. The

German fiscal deficit is one 15th of that of the UK. We need markets

to focus on fundamentals, structural reforms in the eurozone,

and get beyond the current market panic. What do you make of what

Paul has heard this evening, Anton La Guardia, he talked about the 60%

haircut now, which is slightly more than a haircut, let's be honest, do

you think that was a shock document, as he called it? It was more like a

scalping, isn't it. I think they are slowly coming to more realistic

figures. That assessment took a long time to come out. We think

because there was a disagreement between the commission and the IMF,

who now seem to have adopted a tougher position, saying you have

to get realistic numbers out if you are going to begin to address the

problem. Until now they have tried to get some money out of the

creditors, in order that the official, that the Governments

wouldn't have to pay so much for Greece. It has been done on a

voluntary basis so you wouldn't trigger credit default swaps, which

is insurance against states' faulting. If you are going to 50-

60%, it seems to me it is hard to call that a voluntary contribution

from the private sector, you are in different, unchartered territory

here. It has happened for the developing world. We have seen lots

of defaults, debt restructuring around the world. We haven't really

seen it, for a long time, in the western industrialised world.

Louise Cooper, isn't this just semantics, at the end of the day

this will take two trillion YuriGagarino50 rows and the - euro,

and the countries can decide who takes? The trouble is as we heard,

is the German taxpayer cannot transfer wealth to Greece or any

other countries as yet. German constitutional law prohibits it. If

you want a permanent solution to the crisis, we have to change

treaties, laws, you have to have 17 countries agree to it together how

long does it take the EFSF to be ratified from the summer, months.

The bottom line is democracy is getting in the way here. People all

over Europe are saying why is taking so long to sort out, and

that is because everything has to go through the German people right

now? That is one thing, the bigger thing is more important. If the

European bank would buy assets on the scale of the Bank of England,

then the problem would be solved immediately. If the European

Central Bank were to buy Government bonds to the same scale that the

Bank of England has done, relative to the size of the British economy,

then the ECB could buy 1.5 trillion euros worth of Government bonds.

The key difference between the eurozone and Britain, is not the

political situation, it is that the Central Bank in the eurozone is

much more reluctant to actual step in. That's why the policy makers,

what you call democracy, the Parliaments actually have to do

much more of the heavy lifting. So I think, in the very end, if over

the next five days, there is no final solution from the policy

makers on the fiscal side, then it will be up to the European Central

Bank to do its duty, just like the Bank of England has done. And the

Germans are worried about how the European Central Bank will look and

the French are worried about French banks losing their credit rating.

You have got this circularity here, the ESSF has been construct - EFSF

has been constructed to recapitalise the European central

banks, by doing that they have to raise money to give the them money.

The two are target. The markets are rallying tonight, it must mean they

know there is a deal within reach? There is hope, there is a couple of

things to bear in mind, volitility is increasing in markets, how much

they swing around. And also co- relation, when all assets move in

the same direction together. That is an indicator of fear. There are

indicators of fear and stress in the system, I wouldn't get too

carried away with today's rally. Thank you very much for joining us.

European disharmony is a little closer to home tonight too. There

are signs that the Conservative rebellion on matters EU is growing.

Downing Street's digging in its heels over a backbench motion

calling for a referendum. The Tories can't really afford any sign

of dissent on the suggest like Europe again. Is the Government

being too heavyhanded at a time when the European project is not in

such great shape. Nick Clegg says why he thinks it is a bad idea.

is important to step back and ask ourselves what is in Britain's

interest. We have this firestorm happening, right on our doorstep at

the moment, in the eurozone, which massively effects families,

communities and businesses in this country. If you don't have a strong

prosperous eurozone you don't have a strong prosperous UK. It is as

simple as that. This, it seems to me, would therefore be the worst

time to start having some arcane institutional debate about what

might happen in the European Union main years to come. We have a

firestorm to deal with right now, we should focus on that, not

talking about debates which many families will think is academic

when people are worried about jobs and prices in the shops and want

the economy to be sorted as quickly as possible. Our political

correspondent is with me now. They are not totally convinced by Nick

Clegg or David Cameron's position either? The irony, for the first

time in two decades the Conservative Party are more united

on Europe than ever before, and the most sceptical on Europe than ever

before. There was a growing gulf between the leadership and many of

the backbenchers. Just to give you a sense of this, some of the people

I was speaking to today. One MP spoke to me of idiocy in Downing

Street. A ministerial aide said the atmosphere is bloody, and

backbenchers have been rating the handling of the issue on a scale of

starting bad and going up or down to totally appalling. The position

is tonight, 66 Conservative MPs are willing to back this rebel motion

on EU, the multiple choice referendum on the EU, get in, get

out or renegotiate. That number could, I'm told, go up to as many

as 0, maybe 100, by the time it is debated on Monday. One of the

reasons is Downing Street rejected today a compromise amendment put

forward than none other than David Cameron's former press secretary,

George Eustice, a sign itself of some of the divisions we are seeing

at the moment. 22 Conservative MPs who are backing that amendment are

now much more likely to back the rebel amendment. I spoke to one a

little earlier this evening, she told me why she was thinking of

backing the rebels. I certainlyam thinking about backing with the

substantive motion if our amendment isn't called or voted down. The

reason is people in Britain voted for a single market in 1976, they

haven't been given the chance since then to vote on anything else. They

deserve to have their say. If you are right about the numbers, they

are pretty substantial and will be after the weekend. Do you think

this is a rebellion that can be diffused? There are attempts to do

so on both sides. One cabinet minister and many other ministers

have been arguing for the the debate on Monday to be turned into

a free vote. Or the whips to back off. Downing Street are trying to

defuse it in a different way. To underline the determination David

Cameron is meeting all the MPs on the lowest rung of the ministerial

ladder at lunchtime on Monday and say there will be career-limiting

consequences if you don't play ball on this. As things stand, four of

those MPs might well resign their positions. Labour is not that

united over this either? There is a wider issue, it came about as a

result of an attempt to make Parliament more transparent and

accessible to the public. 100,000 people signed a petition, the

backbenchers scheduled a debate on the issue. And then were surprised

the Government got concerned. Some of the concerns are on the Labour

side as well. 12 Labour MPs might break their own party line and

former Europe minister Keith Vaz, is likely to be one of them.

some extent the motion on Monday has been hijacked by the decision

of the major parties. Clearly the motion will be defeated. I think

that does raise questions as to whether or not we have had an

increase in power in Parliament. I think the public will feel rather

puzzled at this. I don't think there is any need for high politics

in this. It is a straight forward discussion which we ought to have.

There might be a slight irritation from Ed Miliband about a mini-

rebellion in his own ranks. For David Cameron it looks like a

smoldering resentment on the backbenches forsome some time to

come. With me now, Danny Finkelstein, the executive editor

of the Times, and former advisor to William Hague. And the Conservative

MP, Douglas Carswell. Thank you for coming in. Clarify what you are

doing on Monday, and how much support you think there is for that,

Douglas Carswell? We are trying to give the House of Commons an

opportunity to vote on whether there should be an EU referendum.

Let's be clear, we are not doing this because people like me

triggered this. This was triggered by the people, tens of thousands of

ordinary people in Britain, who have insisted, using this new

mechanism, that we put this on the parliamentary agenda. All these

politicians who say we need to renew democracy, shouldn't complain

when people insist we put it on the agenda and debate it. How many

others will defy the whip? I'm not here to talk about numbers. If we

are talking about 100, is that ball park figure you would go with?

will be a genuine parliamentary occasion where some people will

make up their minds on the arguments put forward in the

chamber. This is about restoring purpose to Parliament, I hope we

will see good debate and MPs obey the three-line whip put to them by

their constituents. This is about a petition that has come from the

people, which is what the new legislation has all been about,

asking people what they think? There is a good thing to have a

debate. I don't understand in the motion, for the first time you have

three proposals on the ballot paper, are you proposing a straight vote

between the two or an alternative vote or preferential system. It is

not a binding resolution. Is the proposal a straight vote.? This is

about making sure that the question of whether or not we should, the

detail of the question will be decided by the later date. There

are three proposals? The Electoral Commission will decide the precise

wording. What is your view? This is about deciding who that Parliament,

and the view of Parliament is there should or should not be a

referendum. You have a three-part motion, and you haven't decided if

it should be preferential, it is obviously critical to this, whether

it should be preferential or straight. This is my concern about

it. I think you haven't thought through the consequences of this.

You are basically going to end up spliting Euro-sceptics n two ways,

first of all between the people who want to roe negotiate and those who

want to leave. - renegotiate and those who want to leave. Or split

between people like me who think we should have prososals on the table

rather than some vague notion of renegotiation, and people like

yourself who would prefer to leave. You are going to split it, Fernando

Torres and misthe goal by two inches, that is what we are like

here. Why is David Cameron so scared of the proposal? If Danny

and the whips are so concerned about splits on Monday, make it a

free vote. I'm talking about the coherence of your proposal. You

haven't said if you want a preferential vote or a straight

vote? The precise details are up for the Electoral Commission, it is

about Parliament in principle should be allowed to decide. Danny

says don't trust the people. know we don't know if it will be

straight forward, what does the word "renegotiation" mean what if

people think we should renegotiate to give the European Union more

power? The precise wording is matter for the Electoral Commission,

it is about whether we trust the people. Why have you included three

questions at all. This isn't about the bubble. I'm talking about your

question. The trouble with all this is, exactly what Nick Clegg said,

it all sounds academic. We have seen the kind of problems Europe is

facing, you are talking about the two or three questions or all the

rest of them? It is because of the Dire Straits the economy is in,

because of the mess the economy is in, we need to put Europe on the

agenda. Until we discuss debt it is not on the agenda. The debt is 12

billion, the cost of the EU is enormous, we have to decide whether

it is worth paying the money. is fair enough? Danny says we

shouldn't, I think we should. concerned about the sloppyness and

timing of your proposia. You will ruin the idea of a referendum for a

generation and hand the people, who want to carry on with Europe as it

is, with a great victory. That is what I'm concerned about. I'm glad

the Government is rallying Euro- sceptic to think through what you

haven't. Is the Government panicking enough to whip it?

glad of the robust stance. Otherwise you get everybody who

says there ought to be a referendum, of course there should be. Can I

deal with the timing. Danny and others are saying it is the wrong

timing, this was put on the political agenda by the people.

Danny is saying tens of thousands of British people up and down the

country are wrong. I say they are right. He is not saying that?

not the right time to discuss it, or have the referendum. Your

proposal, is also at the wrong moment, we don't have proposals

from anybody as to what renegotiate might mean. People who are voting

might not know what they are voting for. You are asking for a

referendum on a system you haven't established with a question you

don't understand. The details of the question will be decided by the

Electoral Commission. Are you worried that it could be perceived

as Tories arguing over Europe again, it is an easy headline? There are

divisions between the Conservative Party and all three parties about

Europe. The divisions over Europe have happened for 20 years, without

there being a referendum. Maybe it is time to consider that a

referendum is a way to heal the divisions the Conservative Party,

by having a referendum we could trust the people. The SNP deputy

First Minister, Nicola Sturgeon, told their conference today that

she believed Scots would vote for independence when asked. Alling it

a once in a generation opportunity. The other parties say they want us

to spell out what independence means. So let me spell it out.

Independence means so longer having to watch our national wealthered by

Westminster Governments. The SNP's Nicola Sturgeon, that is all from