EU leaders set for showdown on fate of euro

Europe is braced for a crucial 48 hours of high-stakes summitry likely to decide whether Germany and France can strike a grand bargain aimed at dispelling growing pessimism over the chances of the single currency surviving in its current form. While eurozone finance ministers are to meet on Monday in Brussels, apparently at a loss over how to respond to political paralysis in Greece and a worsening crisis in Spain, all eyes are on François Hollande, the new French leader, who is to go to Berlin for his first face-to-face meeting with the German chancellor, Angela Merkel, as soon as he is sworn in as president on Tuesday. Hollande, Europe's new champion of growth policies, lines up against Merkel, the dominant cheerleader of austerity as the solution to the crisis. The German leader, increasingly isolated if inherently strong in the European contest, suffered a big setback on Sunday night, with her Christian Democrats slumping to a crushing defeat in an election in the big German state of North-Rhine Westphalia, according to German TV exit polls. Against a background of intense volatility, Europe was pulled in opposing directions by voters, protests, and political paralysis at the weekend, deepening uncertainty over its future shape and gnawing away at the prospects for the euro's survival as a 17-country union. Ed Balls, the shadow chancellor, and the former EU commissioner Lord Mandelson claim that the coalition government must commit with other European governments to a new growth strategy if the eurozone is to survive. In a joint article for the Guardian, Balls and Mandelson call for a "new political settlement" across the continent to achieve growth. The business secretary, Vince Cable, gave a bleak warning that if the eurozone fails to contain the problems facing Greece then Britain could face a huge economic impact. He said the UK could only hope that the eurozone's economic firewalls were strong enough to stop the financial turmoil from spreading. He said Britain did not have the problem of managing the issue, as it remained outside the eurozone, but could still be hit. "The problem would affect us if it spread, if you had these contagion effects in Italy and Spain," he said. "[Michel] Barnier [EU commissioner for the internal market] has expressed optimism that those firewalls have now been created, and we must hope he's right – because if they're not, then of course it has a massive impact on our trade – half of our exports go to the eurozone countries, our banks are quite substantially exposed to those countries." The large protests and minor clashes in Spain, political gridlock in Greece, the crucial regional election in Germany, and rising hostility to the EU in the Netherlands have all contributed to an air of crisis supplanting more than two years of financial panic and bitter argument over how to rescue the euro. Hollande goes to Berlin on Tuesday with the psychological advantage, buttressed by a strong new mandate that has shifted the terms of European politics. After a string of setbacks among her political allies at home and in the EU, Merkel was weakened by the spectacular defeat in Düsseldorf. The state election, involving almost one in four of German voters, was seen as a bellwether. Elections in North-Rhine Westphalia are often a gauge of the future of German national politics. The opposition Social Democrats and Greens were on the brink of securing an absolute majority, according to TV projections, with Merkel's CDU said to have dropped between eight and nine points on two years ago and four points below what the opinion polls had predicted. After the French Socialists' presidential election triumph, the victory for Germany's Social Democrats – projected to be up four points from 34.5 – will be seen as a further fillip for the European centre-left. Eurozone finance ministers are to meet in Brussels on Monday to ponder their options, but are unlikely to decide very much, given the political imponderables and the unresolved splits between German-led belt-tighteners and French-led proponents of growth policies as the answer to Europe's travails. Tens of thousands of Spanish people took to the streets to protest at soaring unemployment in a country where anyone under 25 is now more likely to be out of than in work. The fourth attempt in less than a week to form a government in Greece looked destined for failure, signalling weeks of instability before fresh elections likely to strengthen the hard left, which rejects the terms of Greece's €240bn bailout and the restructuring of much of its national debt. Opinion polls in the Netherlands, meanwhile, for the first time showed the hard left, anti-European Socialist party as the strongest single party before early elections in September in which Europe looks like being the central issue. While the pressure from Spain, Greece, and France pointed towards a relaxation of cost-cutting austerity, the signals from Germany went in the opposite direction. The CDU's worst postwar performance in North-Rhine Westphalia, while weakening Merkel, is unlikely to cause her to abandon her tough line on a new fiscal pact for the eurozone and her arguments that Europe's debt crisis cannot be fixed by piling up more debt. The cover of Monday's influential news weekly Der Spiegel declares "Adieu Greece", arguing that it is time to kick the country out of the euro. Almost four in five Germans believed Greece should forfeit its bailout cash if it does not comply with the stringent eurozone terms, according to a poll in the bestselling tabloid Bildzeitung. Against this background, Merkel is unlikely to expose herself to charges that she is going soft on the euro. More quietly, however, the government in Berlin and the German central bank have signalled over the past week that they favour tolerating greater inflation and higher wage increases in Germany in order to spur domestic demand and effect a partial rebalancing of the chronically imbalanced EU economy. Data being released on Tuesday will confirm that the EU is in recession, registering contraction of gross domestic product for the last two quarters. The figures are expected to show very slight growth in Germany while the French economy stagnated.