It was far worse than Angela Merkel imagined: her CDU slumped to its worst post-war result in Sunday’s NorthRhine-Westphalia poll and scored just 26.3%. The social democrats (SPD) scored 39.1% and the Greens 11.3%, giving what had been a minority red-green government an absolute majority. The CDU’s top candidate, her environment minister, quit straight after the scale of the debacle became known shortly before 1800BST yesterday (Sunday).

The scale of defeat is a bitter pill for the German chancellor as she prepares to meet the new French social democrat President, Francois Hollande, tomorrow (Tuesday) just two hours after his inauguration on an anti-austerity platform. The fact that the Liberals, the FDP, her coalition partners in Berlin, defied the pollsters and won 8.6% of the vote – as thousands of CDU voters switched to it – is no consolation; it enables it to distance itself from her.

What’s more, the vote was a resounding raspberry to home-made austerity policies which have seen savage declines in living standards in regions such as the industrial Ruhr around Düsseldorf, Dortmund and Essen. The question arises: is this also a big No to European austerity policies and Merkel’s fiscal pact? Lots of Anglo-Saxon commentators believe the answer is: not necessarily or even a plain no. Germans, pointing out that the CDU campaign was primarily an attack on red-green over-spending/deficits and had at its core the demand for “debt brakes” – or constitutional barriers to deficit spending Germany is now imposing on the eurozone as a whole -, says yes.

Certainly, Merkel and her finance minister, Wolfgang Schäuble, now realize that the domestic agenda must embrace wage rises and, if necessary, above-average inflation to boost domestic demand for goods and services from southern Europe. Schäuble spells out ahead of Hollande’s visit and his own election as eurogroup chairman tonight how austerity and growth policies can be married in the French media.

Certainly, too, last night’s election result is a further boost to the pro-growth camp in Europe – as even the UK coalition government and its Labour opposition understand (see David Seymour for Nucleus today). UK bond rates may be at a record 300-year-low but – as the Greek tragedy reaches yet another messy dénouement – the country needs sustainable growth across the Channel more than ever to prevent a 1929-style slump.

Two decades ago, in the wake of reunification, the then German defence minister, Volker Rühe, officially opened the Bendlerblock as the Berlin seat of his ministry. It was a highly symbolic ceremony: the building was the HQ of those brave if foolhardy Wehrmacht officers who led the July 20 1944 plot against Hitler at the Wolfenschanze and were summarily executed in its courtyard. In the event’s margins, this correspondent and senior German officers discussed their country’s new military role – amid considerable soul-searching on their part.

The first Gulf war had taken place, greeted by a new generation of Germans with huge demonstrations in Bonn’s Hofgarten, scene of the anti-Pershing missile protests beforehand, and banners hanging from windows everywhere: “Nie wieder Krieg” and “Kein Krieg für den Oel“. Rühe, publicly, and his senior staff, privately, had to argue very cautiously indeed for a change in outlook: specifically, for German participation in any “out of (Nato) area” military operations. Many of those officers present at the moving ceremony would have wanted to take part in the Gulf operation but acknowledged that it was politically and constitutionally impossible.

A decade later the then Chancellor, Gerhard Schröder, banned Germany from taking part in the second Gulf war and, specifically, the operation to remove Saddam Hussein. It was a watershed moment for Europe: France also refused to take part; the UK, of course, gladly joined… Yesterday, in Berlin, Philip Hammond, British defence secretary, tried to persuade Germany and Germans to overcome its “historic reluctance” to act “out of area” – not just “beyond its own borders” as this report in the Telegraph erroneously says.

The ban on such overseas operations was, in fact, lifted by the federal constitution court in 1994 so Hammond is, in a sense, knocking at an open door. But each one must now be approved in advance by a simple majority in the Bundestag – and this can be hard to achieve as we have seen with respect to the “peace-building” deployment to Afghanistan (less so, obviously, with the anti-piracy operations off the Somali coast). The politics in favour of an enlarged German military role commensurate with its economic might are, well, not easy. (Germany may well have overcome its “economic giant, political pygmy” soubriquet inside Europe, but not outside it).

Hammond’s speech in front of Thomas de Maiziere, his German counterpart and ex-chief of staff to Angela Merkel, so a key player, and subsequent briefing for Bundeswehr officers has several purposes. First, it is a gentle reminder that, proportionally, Germany spends half as much of its GDP on defence as Britain and France – 1.3% versus 2.6% and 2.3% respectively according to SIPRI. Berlin, enjoying a primary budget surplus in stark contrast to London and Paris, can simply afford to devote more cash to Europe’s defence/military missions. (Since July 2011 it has an entirely professional Bundeswehr since conscription ended then).

Second, in the run-up to the Nato summit in Chicago, it’s a blunt reminder that the US’s strategic vision is firmly directed at the Asia-Pacific, especially China; Europe is no longer a strategic theatre, or virtually not. For the Obama White House, Europe is rich enough not only to sort out its debt crisis, but to pay for its own defence. It’s a message that – so far as one can tell from a cursory reading of the German press – went unnoticed. But it’s one that Obama and his team will want to press.

Germany – the main topic of last night’s televised slugfest between Hollande and Sarkozy in a way – is learning that flexing its economic muscles brings unstoppable demands on it to commit more military as well as monetary bang for its buck…

“The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.”

So said the Italian sage, Antonio Gramsci, as he explained away Mussolini’s rise. The UK government watches on as morbid symptom number one unfolds: this week voters will reject austerity, but their democratically elected leaders will be precluded from providing growth. As Merkel faces the French and Greek people how can this logjam be broken and can the UK do anything?

Growth gurus are this week seducing politicians with another big bazooka solution. As Robert Kuttner, co-editor of The American Prospect, says,

“It is not difficult to imagine a growth agenda. Some European countries have very large deficits, mostly the consequence of the recession itself. But the Euro zone as a whole has plenty of room for fiscal expansion. The EU as a whole needs to launch a massive development program in the spirit of the Marshall Plan — the Spanish newspaper EL PAÍS writes that senior leaders in Brussels are talking of such a plan in the range of 200 billion Euros.”

So can Germany swallow another quick fix?

Worried that Hollande’s campaign has surged on this Marshall Plan growth splurge in direct contradiction to Berlin’s fiscal pact, the Germans are mobilising to counter French manoeuvring, courting Mario Monti in Italy and Mario Draghi at the ECB, united in the mantra that “there is no alternative to fiscal consolidation.” Although Monti last week warned that the austerity drive risks shrinking the euro area economy and leading to a double-dip recession, he was careful to steer away from direct criticism of the German chancellor. As David Marsh, co-chairman of the Official Monetary and Financial Institutions Forum, says,

“that was probably wise. Italy may well find itself in need of an EMU – for which read German – bail-out if the country’s bond yields continue to rise and the economy continues to contract.”

All well and good, but Berlin suddenly faces a democratic lose-lose scenario which trashes its beloved fiscal pact and leaves Europe sleepwalking. First, austerity will have the people’s thumbs down from almost all Europe soon. The longer austerity is maintained and increased without any seeming benefit in terms of growth, the wider the opposition will be. Britain’s double dip makes it the twelfth EU member state now in recession. Second, with Germany closely identified with the austerity policy, austerity fatigue will erode German influence over the euro area. This is even more likely as German politicians, frit of their own voters, refuse to do the one thing that could justify and alleviate the impact of austerity on others, namely stimulate Germany’s own economy and, crucially, re-orientate it towards greater domestic demand.

Says David Marsh: “At the moment, Germany is getting the worst of two worlds. It is imposing austerity on other countries, which among other things stops them from buying German goods. And it is making these countries adversaries, by seemingly enforcing a ‘pain but no gain’ policy. Neither can be a good idea for Germany.”

So the question is how long can Germany resist the unpleasant truth that, as it hangs onto its pennies, it loses its moral and political authority.

Is the Marshall Plan another idea to nowhere?

Possible not and nor is it new. Ian Traynor explains the growth thinking in Europe:

“The “project bonds” idea has been pushed for ages by the European Commission and its boss, Jose Manuel Barroso. He wanted to use bits of the EU budget the same way. Now this is emerging as the lowest common denominator compromise for avoiding a Franco-German clash (Hollande-Merkel) over growth and austerity.”

Currently, there are few details on the plan available but the main mechanisms for achieving the funding seems to be to increase the European Investment Bank capital by €10bn, which it is claimed would boost the lending capacity by €60bn and overall investments by €180bn and use the remaining €11.5bn in the European Financial Stability Mechanism (EFSM) as initial capital to be leveraged in the private sector.

Does George Osborne, so clear that the Eurozone crisis is the cause of the new UK recession, endorse this Keynesian scheme to mitigate the pain of austerity? Well, as high speed rail proves, he is not averse to pump-priming infrastructure projects at home. And the Marshall Plan would be an EU scheme rather than just a eurozone one with proportionate access and funding. This also means that as a contributor to the EIB and EFSM, the UK would have to be involved in the whole thing which would awaken the beast that is Bill Cash in Westminster. Worse still for Numbers 10 and 11, Parliament is yet to vote on ratifying the permanent euro bailout fund (European Stability Mechanism).

As the government tears its hair out at the prospect of another European bust-up, Nucleus sees this as an opportunity to practice and preach the growth agenda in Europe to avoid the impression of British powerlessness over the Eurozone car crash. So far, we have half the EU supporting Dave’s single market letter. Now, it must be time to put flesh on the bones of the European message by supporting Eurozone growth in order to avoid stagnation at home. Even Open Europe says:

“In principle this could be a positive idea for Europe – we like the focus of the investment and if it is conducted in the right way, it could be worth the UK participating. However, it’s hard not to be slightly sceptical about how Europe tends to go about these kinds of schemes, which could instantly undermine that case.”

Back to Gramsci: the new cannot be born unless the morbid symptom is cured. This is no time for the luxury of being ‘slightly sceptical’ when the answers are obvious.

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Coming this week to the Eurozone bust-up: Greek and French general elections, local elections in Italy, the Irish referendum campaign, the fallout from the fall of the Dutch Government and a meeting of the European Central Bank. Little wonder that the PM in his Andrew Marr interview yesterday returned to the euro stage to warn that the eurozone was not halfway through its difficulties. To raspberries from across the Channel he hinted that the euro may not survive, expressing a frustration shared in Washington and other world capitals that a big financial “bazooka” to defend the single currency remains stillborn:

“It’s going to be a very long and painful process in the eurozone as they work out do they want a single currency with a single economic policy and all the things that go with it, or are they going to have something quite different?”

His intervention underscored the concern in No 10 over the potential for the euro emergency to torpedo a British economy struggling from a double-dip recession. And the PM should be on top of this for three reasons:

1. If Hollande wins the mood music changes

Political infighting over Germany’s insistence that euro area governments slash borrowing as rapidly as possible is growing rapidly. France’s Socialist presidential contender, François Hollande, has called for the Merkel’s ‘fiscal compact’ to be renegotiated to inject pro-growth elements. Mario Draghi, president of the European Central Bank, is promoting a “growth compact”, which has gained currency in some EU capitals. For two years the PM has endorsed both ideas. He backs Merkel’s rigour and promotes economic growth. The question is whether these two ‘compacts’ can be reconciled if Hollande wins. Bill Emmott in The Times says,

“In principle, they can indeed be reconciled. The means of reconciliation need to come quickly, probably in the form of his first phone calls and meetings with Angela Merkel, Germany’s hardline but strongly pro-euro Chancellor. What he is likely to want is a pact that Germany will find hard, but not impossible, to accept. Senior German figures, including politicians and officials surrounding Mrs Merkel, know that the eurozone’s current course is not sustainable. Fiscal austerity is unavoidable given the doubts held by investors about the solvency of Greece, Spain, Italy, Portugal, Ireland and even perhaps France, but it is bringing about a deepening recession that is also making continued austerity appear untenable. Something needs to change.”

He expects three solutions:

“The first would be a Greek default and exit from the euro, with an accompanying package of financial support from the European Union and the IMF. The second would be a eurozone-wide plan for publicly financed capital investment. The third would follow the proposal tabled in February by Mr Cameron and Italy’s Mario Monti, along with nine other European leaders, to launch a liberalisation drive to extend the continent’s single market and thus stimulate private investment.”

Will this actually happen? So far, every time the euro has come to a fork in the road, its leaders have just carried straight on. But the French election could be the moment when that changes. If he does try to pick a fight with Mrs Merkel, President Hollande simply could not afford to enter into a lengthy battle while the markets destroy what is left of France’s financial credibility. But it is not hard to see how a redrawn “fiscal and growth pact” could allow Mr Hollande and Mrs Merkel to claim victory and keep the Franco-German motor running. As David Charter says also in The Times:

“The current argument over the fiscal pact is the same as the one that took place in 1997 between a certain Dominique Strauss-Kahn, then France’s Socialist Finance Minister, and Theo Waigel, his conservative counterpart from Germany. Mr Waigel had drawn up a “stability pact” as a condition of German agreement to the single currency. Mr Strauss-Kahn argued for a “growth programme” to protect workers from what was seen as a recipe for austerity. The result was the “stability and growth pact” that saved face for both sides and set the rules for deficits and borrowing that are now being modified by Mrs Merkel’s fiscal pact.”

Britain could be positioned to act a non-playing honest broker between Paris and Berlin if anyone is the Bundeskanzlei and the Elysee would care to listen. Alas, yesterday’s pooh-poohing of Dave’s ‘I told you so’ comments would suggest they won’t. But he should insist.

2. Merkel is isolated and Germany must decide if it wants the euro to survive

Whatever happens, Germany needs to make a definitive decision to both transfer funds to the indebted economies and stimulate the demand of its own consumers and businesses for traded goods. This will be a tough decision, but the collapse of the eurozone would be a disaster for the growth prospects of Germany — and indeed of the UK. However, ‘growth’ proposals likely be aired by the “Ecofin” council of finance ministers on May 15, will bring stark divisions over fiscal strategy into the open. There is speculation that a “Latin bloc” – with allies in core Europe such as Austria – could try to force a rethink on austerity if François Hollande is elected. Ambrose Evans-Pritchard in the Telegraph says Mrs Merkel will have torelearn the forgotten art of compromise. He believes:

“This then is the birth of a Euroland growth bloc with well over 200m people and a commanding majority vote in the European Council, a defining moment in this saga. Unable to dictate terms, she may struggle to deflect the ruinous implications of monetary union onto other EMU countries for much longer.”

The Latin Bloc might politely tell Berlin: acquiesce in the new landscape, or expect Latin Europe to take matters into its own hands and bring about the fiscal, monetary, and exchange conditions needed to safeguard its societies – entailing a very nasty shock for German banks and exporters. In any event, the real question is whether Merkel can continue to withstand the hostility around her. Even her potential partners after the September 2013 election would impose Eurobonds tomorrow if they could. It must be getting lonelier in Berlin.

3. The politics are dangerous

Next Sunday’s elections in France and Greece might be about to send the eurozone countries in a turbulent, anti-Merkel direction creating a new period of panic in the financial markets that could again bring the euro to the brink of disaster, as David Cameron has warned. Whatever the economic problems, it is people – mainly the low-skilled and poorly educated, the supposed losers from globalisation—who are most openly in revolt. For them European integration is not the solution, but the problem. Greece’s election on May 6th will reveal deep resentment over the severe recession that austerity has brought as will Ireland’s May 31st referendum on the fiscal compact.

Whilst Merkel can stonewall the Keynesians, could she live with being the woman who not only destroyed the euro but also destroyed peace and solidarity in Europe? In both France and the Netherlands, between one-fifth and one-third of voters support extremist parties that oppose European integration, globalisation or both. These forces are deemed to have brought wage-sapping, job-destroying competition. The far right adds that they have also brought welfare-grabbing immigrants, above all Muslims. With European leaders expressing alarm about the rise of extremists and populists, one German daily, Handelsblatt, asked in a front-page headline: “Is Europe failing?”

Merkel may see the general election in Greece on Sunday (just as last Sunday’s in France) propel parties of the extremes to big electoral gains. If the Dutch election in September sees a surge of support for both the left and the right – which are united in their rejection of her policies, she would find it impossible to deny that the rise of political extremism in Europe is in part the consequence of stubbornness and stupidity among German political elites.

So it is time for the UK to stop cowering in its post-December 9th shadow. It is certainly time to make his message clear: the UK believes in growth and stability as the solution to the Eurozone crisis. It is also high time he rebooted his diplomacy in the face of likely political and social upheaval to come. When Mats Persson, Eurosceptic director of the Open Europe think-tank, thinks Dave’s latest euro comments are “unwise” and recommends huge scope for improvement in diplomatic relations, you know something is wrong.

If eurosceptics are calling for better British leadership in action, perhaps No 10 should listen.

Parliament’s International Development Committee today publishes its report on EU development assistance. The Committee of MPs found that over 50% of Europe’s development aid budget is going to “relatively rich” countries like Turkey and Serbia, and warned that this situation “could devalue the concept of aid”.

The UK, in addition to its own widely lauded international development and foreign aid programmes, gave £1.23 billion in aid via the EU in 2010.

International Development Secretary Andrew Mitchell recognised the criticisms, but argued that the EU is“already reforming the way it spends aid, making it more transparent, results-focused and targeted at the poorest people”.

The report adds to the criticism of the EU’s development aid approach, following the Organisation for Economic Co-operation and Development (OECD) peer review, published on Tuesday, that said European Union development co-operation is “improving, but still cumbersome”. The review warned of the strong possibility that the EU will miss its target of boosting collective aid to 0.7% of gross national income by 2015 because of financial pressures.

The OECD also called for the EU to develop a more cohesive approach to development aid and speak consistently with a unified voice or risk its influence and impact weakening, following the major assessment of its aid programme.

Greece and Portugal slashed their aid budgets by more than 30% in 2011. Obviously fearing others will follow, and with increased public scepticism and more intense scrutiny of aid budgets, the OECD has urged the European Union to better demonstrate to the public the successes of its aid programme through improved communication… not an area in which the EU excels.

Perhaps Nucleus can help. The EU is a major international player in development aid. In 2011, the EU provided €53.8bn (£43.8bn), more than half of the entire global aid total. The EU’s development programme, ‘Agenda for Change’, launched last year by the EU development commissioner, Andris Piebalgs, focusses on democracy, human rights and governance.

Some of the world’s poorest states, such as Somalia, are major beneficiaries of the European commission’s €11bn annual aid budget.

Mark Tran in the Guardian notes, “The review from the OECD’s development assistance committee (DAC) acknowledged positive steps taken by the EU since the last peer review in 2007, including major organisational restructuring, efforts to streamline financial instruments and enhancing dialogue with civil society.”

There is still progress to be made though, with the latest review stating,

“In completing the reorganisation [the EU institutions] need to be clear about responsibilities of each institution as they work together to implement the development co-operation programme. The EU institutions also need to strengthen knowledge management and lower the administrative burden on partners and EU staff to improve the impact of the programme.”

Internally, the EU is overhauling its controls to prevent waste in regional development projects – the biggest EU budget item.

Laurence Peter for the BBC, writes that “in the past auditors have found many errors in the management of “cohesion” fund projects, which are intended to develop the EU’s poorest regions.”

The EU Commission aims to address this issue by implementing formal contracts with national partners.

However, pressure on member states’ budgets means the level of cohesion spending is under fierce debate. Surprise surprise, the richer countries are pushing for cuts, whilst the poorer, mostly former-Communist member states, cry foul.

The European Commission has proposed cuts: a cohesion budget totalling €336bn (£275bn) for the 2014-2020 period, compared with €354bn for the current period (2007-2013).

The result is a clear split: Earlier this week European Affairs ministers from 13 members states urged the EU in a letter not to cut that budget any further, whilst net contributors, including the UK, Germany and the Netherlands, lobbied for even deeper savings.

The letter referred to was signed by Bulgaria, Estonia, Greece, Hungary, Latvia, Lithuania, Malta, Poland, Portugal, Romania, Slovakia and Slovenia. Croatia, which is set to join the EU in the summer of 2013, also backed the statement, reports Ana-Maria Tolbaru for EurActiv.

“Cohesion policy should have its resources concentrated on less developed regions and member states,” said the group, made up mostly by net beneficiaries of cohesion funds.

Leonard Orban, the Romanian minister for European affairs, called the step “an important achievement” and said member states could for the first time stand firm and reach common ground on the matter, despite their national differences.

The response of many in the net-contributor countries was illustrated by the likes of Open Europe’s Pawel Swidlicki, appearing on Welsh television to dangle the carrot of £1bn a year extra for the Principality, were regional policy to be devolved back entirely for richer member states such as the UK.

Vote winning stuff Pawel, and charity does begin at home, but it rather misses the bigger picture. In a globalised economy, particularly within the close-knit EU, regional development is a boon to all, not just the direct recipient. A steady stream of development aid is preferable to large emergency hand-outs.

Pushing hard for improved delivery and sensible budgeting is one thing, calling for swingeing cuts quite another.

The UK, and the EU, are rightly proud of their highly regarded aid and development programmes. Now, more than ever, that ought to be cherished.

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“The figures are terrible for everyone and terrible for the government… Spain is in a crisis of huge proportions…”

So said Spanish Foreign Minister Jose Manuel Garcia-Margallo in a radio interview this morning. He might have added: Europe is in a huge crisis. It has until the late June EU-27 summit to stop kicking the can down the road and start implementing a real plan to solve that is a triple crisis: of debt, banking and growth.

Rounding off a bad week for Europe, today’s Spanish unemployment figures are simply horrendous: 5.6m officially out of work, a rate of 24.44%, one of the highest in the world. Already, more than half the country’s youth is jobless. Now, 1.7m households are without anyone in work. The country is in a deep recession and expected to stay there all year – and, compounding it all, S&P overnight cut its sovereign rating two points because of…worries about a contracting economy.

Like our own Boy George, Mariano Rajoy, the centre-right premier, is sticking to Plan A: cutting the budget deficit come what may through more than €30bn of cuts. What is certain is, as Thomas Mirow, head of the European Bank for Reconstruction and Development, said in the City yesterday (citing the IMF): by the end of this year, Spanish GDP per head will be 48% of Germany’s – “almost wiping out the gains of a dozen years of convergence” under EMU.

Mirow, a German social democrat, told the Official Monetary and Financial Institutions Forum (OMFIF): “Convincing structural reform improves the long-term solvency of government, thus reducing borrowing costs and the austerity required to achieve a given deficit reduction path. This can lead to a virtuous cycle. But conversely, there is also a danger that austerity depresses short term growth to the point where its destroys the willingness of the population to support structural reform.”

There’s the rub: as several of his fellow panel-members pointed out, Spain and the rest of southern Europe are dangerously close to that point. Unemployment at these levels is, historically, a breeding ground for political extremism (if the French jobless rate were 20% rather than 10% what would Marine Le Pen’s score have been last Sunday?) Angela Merkel’s fiscal pact may end up being rejected by more than just two (UK/Czech Republic) in the end as Mirow concedes; Vikki Pryce says it’s dead. The urgency of constructing Mario Draghi’s proposed “growth compact” gets more vital every day.

At the same time, it’s clear that Europe and, especially, Spain has to take on the banking crisis and sort it out via a drastic clear-out and huge recapitalisation programme. The talk in the margins of the OMFIF conference was all about this – and the continued starvation of credit/capital to small business, the engines of growth. Europe’s bloated banking sector cannot be allowed any more to sit on mountainous piles of cash – and redistribute it to its top executives.

This is of elemental interest to the UK which, we were reminded, remains Germany’s third largest export market…Yet, again on the margins of an event billed as “EMU’s future: 20- years after Maastricht,” one heard an extremely senior ex-civil servant say the only politician to get it right at the Dutch market/university town and foresee troubles ahead was….John Major. And Gordon’s five tests remained on tablets of stone. When Mirow told his gasping audience that – apart from the Czechs – all ex-communist EBRD clients/EU members still wanted to join the euro (it’s a condition of joining the EU), albeit a bit later, heads rolled in disbelief: “The latest bunch of lemmings,” said one expert. Smug complacency is shared beyond No 11…

Yesterday, George Osborne blamed the 0.2% economic contraction on the Eurozone crisis. His senior aide issued this statement:

“GDP is -0.2%, so 2 quarters of negative growth is technical recession. Clearly the UK faces a tough situation having built up huge debts, even given falling unemployment last week. George said in the autumn statement that if Europe went into recession it would be hard for the UK to avoid one. Eurozone now forecast to be in recession as well as non euro countries like Holland, Denmark, Czech Republic. One thing that would make it worse is yet more borrowing.”

Conservative grassroots website, ConHome, thinks that recovery will begin once the Eurozone collapses, a view totally opposed by the Chancellor. Editor, Tim Montgomerie, thinks the Eurozone situation is hopeless, saying, a “break-up will hurt but essential surgery always does“. He reminds us that three-quarters of French voters rejected Nicolas Sarkozy, who emphasised budget balance. The Dutch government collapsed after the extremist Geert Wilders looked at opinion surveys and concluded that voters had had enough of EU-directed spending cuts. He added:

“Spain is in turmoil over austerity. The Greek electorate will soon give its verdict on the economic medicine that it is having to swallow in the name of the Eurozone. The key thing that Europe needs is growth and as long as the €urozone isn’t allowing the likes of Greece, Portugal and other high debt/unemployment nations to competitively devalue there’s little chance of growth resuming.”

Two questions: First, is collapse good for Britain? Tim’s colleague on ConHome, the economist Andrew Lillico, must disagree. He warns:

“a disorderly collapse of the Eurozone could trigger the collapse of much of the banking sectors of the developed world and impose as much to twice as much recession upon the UK as we had in 2008/9. Eurozone leaders have urged governments to focus on growth amid fears about the negative impact of austerity measures.”

Second, is nobody talking about growth? Actually they are, Tim. Just as ConHome sells us the economic case for self-immolation, readers will be glad that yesterday European Central Bank President Mario Draghi called for a “growth compact” and German Chancellor Angela Merkel also called for more economic growth.

“In Europe, we are called on to overcome the sovereign debt crisis. On one hand, that can be done with a sustainable fiscal policy… but that is not a sufficient method of overcoming the crisis, because we also need growth. We need growth… in the form of structural reforms, as European Central Bank President Mario Draghi said,” she added.

In France, online sources expressed their great surprise at Mr Draghi’s statement on his growth compact. This item openedFrance 2‘s evening news bulletin, which reported that growth is now the new leitmotiv in Europe. The French press was unanimous: Mr Draghi’s statements marks a turning point and a shift in the political balance Europe. Libération noted that Mr Hollande’s proposals for the economy are already under study at the European Commission. In fact, as Les Echosreported, discussions on growth are intensifying in Brussels at all Directorates General.

Interestingly, is Germany getting austerity cold feet? The FTD reported that many countries who have criticised the harsh austerity policy of the EU are now slipping into a recession. As we said yesterday, La Repubblica has noted that Ms Merkel wants to prevent Germany’s isolation in the EU and seems to be ready to support new proposals, while the possible end of the ‘Merkozy’ axis has fuelled German doubts over the last few days. According to La Repubblica, Ms Merkel wants to prevent Germany’s isolation in the EU and seems to be ready to support new proposals, while in the UK, The Daily Telegraph marked the end of the ‘Merkozy’ axis now that Nicolas Sarkozy has promised to hold a referendum on the fiscal pact, dealing a hammer blow to Angela Merkel’s “non-negotiable” plans to impose austerity on the eurozone. Worse still for the Chancellor Naftemporiki reported that EC President Jose Manuel Barroso, during a joint press conference with EP President Martin Schulz, said it was clear that Europe needs investments and growth, besides fiscal consolidation.

Meanwhile, in two separate interviews with Sky TG 24 and Il Sole-24 Ore, EC Vice President Antonio Tajani said that, after meeting with Angela Merkel, all EU countries should focus on growth. He told Sole-24 Ore that Germany now seemed to be ready to support new reforms for growth, because it was also worried by “extremist fringe groups” that may increase instability in the EU.

So, Europe is rallying to the growth flag in order to save the Eurozone and minimise extremism. As Germany wants no Eurozone break-up and no destruction of the political status quo it looks as if Merkel is being encircled. So let us see what growth proposals might come. I would suggest the UK government dust off its “Let’s Choose Growth” and start persuading member states to get active.

The UK is officially in recession: Wednseday’s figures show a 0.2% contraction in the first quarter after one of 0.3% in the final three months of 2011. The City and its media acolytes have got egg all over their face after predicting a “bounce-back” of 0.1% growth; a 3% collapse in construction activity put paid to their forecasts. So, too, has George Osborne. The British economy has grown by 0.4% in the eight quarters of his tenure compared with the 4.3% he promised, according to @faisalislam of Channel 4 News.

On cue, the Chancellor is, first, blaming the eurozone’s actual or pending recession for the decline in British economic output – and sticking to his “credible” Plan A of spending cuts/tax rises to slash the budget deficit and, magically, restore growth. He, Angela Merkel and, perhaps, Mark Rutte, the hapless Dutch premier, are the only ones left in Europe promoting this austerity course.

We’ve seen the social pain and unrest this course brings and, now, increasingly, the political impact: the centre no longer holds, voters drift to the extremes. Paul Mason of Newsnight has a good take on this. As has the Guardian’s Ian Traynor. The economic recovery may be taking longer in Europe than in the 1930s but we are not – yet – in the socio-political extremes of that terrible decade.

Germany, presiding over a virtually non-existent budget deficit, a 20-year low in unemployment and (until recently) record exports, is starting to feel the tensions. The German press is awash with reports of Merkel’s growing isolation in Europe. There are even strong suggestions her coalition may not survive until the autumn of 2013 when fresh elections are due (or she may call an early dissolution of the Bundestag). Rutte, cheerleader for austerity as the path to virtuous growth, may limp on for a few months in The Hague.

The wind, for once, appears to be in the centre-left’s sails as Francois Hollande inches his way towards the Elysée. Backed by conservative/technocrat leaders in Italy, Spain and Greece, he believes a pro-growth strategy is essential to bring the EZ and EU as a whole out of the mire. Some of what this means is spelled out in the Financial Times: ‘Hollande seeks wider EU fiscal pact’ by Hugh Carnegy, and also from yesterday’s edition, ‘Sinking Dutchman haunts the eurozone’. If we believe what Michel Sapin, ex-finance minister, tells the FT, Hollande’s proposals are modest. Far from promoting neo-Keynesianism in one or more countries, or demanding a root-and-branch renegotiation of Merkel’s fiscal pact, he’s talking about: project bonds, a more activist R&D policy, and a bigger role for the European Investment Bank in backing trans-European infrastructure projects. This is Barroso’s EU2020 strategy (and the old Lisbon strategy of 2000) revisited in a minor key – hardly enough to enflame fear and loathing on the bond markets.

The key – and Dave and Osborne are right to emphasise this – is Merkel’s Germany. Not much sign of a change of heart yet though. Austerity worked for Germany turning it from sick man back into model economy, runs the mantra in her CDU, which believes it’s therefore right for everybody. Plainly, it’s not – and certainly not for the UK. Joining forces with Spain’s Rajoy and Italy’s Monti – as Cameron did in his pro-growth letter of earlier this year – may not be enough to turn the Eiserne Lady; getting a mildly socialist Hollande on board would help. Why not seize the chance of a brittle Franco-German axis to inject some eurorealism into Europe’s economic policy debate and stop what the FT rightly calls “Europe’s self-harming.” A nous deux maintenant!

Voting in the first round of Europe’s most important election this year, the French presidential, takes place on Sunday. The latest – and last – set of opinion polls give a clear winner and indicate a seismic change: Francois Hollande will be the first socialist victor (on May 6) since Francois Mitterrand in 1988.

Le Figaro reports today that Hollande is clearly in front in four of the six polls published on Thursday evening and neck-and-neck in a fifth. This outcome is confirmed by another one today which puts Hollande on 27.5% in Sunday’s vote compared with 26.5% for incumbent Nicolas Sarkozy. The gap in voting intentions for the key second round in two weeks’ time is far wider: between 7 and 14 points in favour of Hollande. At 20:00CET on Sunday, May 6th, the exit polls on TF1, FR2 etc are likely to say: Hollande, Président.

A word of caution: as many as 38% of those polled say they could change their minds before Sunday; turnout could be low in line with elections throughout most of Europe; three of the other eight candidates – Marine Le Pen of the far right Front National, Jean-Luc Mélenchon of the leftist Front de Gauche and centrist Francois Bayrou – are polling consistently above 10% and their votes will be fought for fiercely in the coming two weeks. Indications so far are that Hollande will fare far better, picking up the bulk of the left Mélenchon votes, than Sarkozy who may struggle to win half of Le Pen’s supporters. (She is on around 16% and in third place in the latest polls). Trying to turn May 6 into a “anti-Hollande referendum”, Sarko may well take more overtly right-wing stances.

The implications for Europe could be profound, especially for the Franco-German axis: no more Merkozy. In a final effort to shore up support for Sarkozy, Berlin has indicated it could back proposals to re-impose border controls within the Schengen passport-free zone for up to 30 days. See the Spiegel piece (in German). Sarkozy has, during the course of his on-off campaign, distanced himself from Angela Merkel, notably over the role of the European Central Bank, but a Hollande victory could signal a much bigger cooling. The Economist’s Paris bureau chief explores this in an excellent blog post. He clearly means business about forcing an EU growth strategy onto the agenda in the run-up top the next EU-27 summit in late June though his ideas on project bonds and a greater role for the European Investment Bank are, relatively, vieux jeu(givens). Calling for a cut in ECB interest rates is, however, for the gallery – and the birds.

The consensus is that a Hollande victory will not be a repeat of 1981 when Berlin – and the bond markets – forced Mitterrand into a retreat over his first-term expansionist plans for the economy. There is a growing sense across Europe, not least in Italy and Spain, that pro-growth policies are essential for the survival of the eurozone. Our Dave need not necessarily feel out of sorts either: the pro-growth letter he and 11 other EU heads of government signed ahead of that fateful December 8/9 summit last year may, with a bit of editing and updating, win great traction six months later on June 28/9.

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Yesterday’s Daily Mail piece about the“excesses and waste” of the European Parliament is the usual example of EU Hate Mail….

For once, the factual details are justaccurate enough to prevent a meaningful case, but everything about the piece – its context, the comparisons that would make sense of the figures, the spin, the deliberate omissions – contribute to leave the readers with a grossly one-sided impression of what is actually going on. Not that this matters to the Daily Mail – notorious in journalistic circles for its inaccurate reporting – as it has long convinced its readers of this version of events.

James Slack’s reporting and fact-checking (the name isn’t a pun is it James?) is at best shoddy, at very worst deliberately misleading.

In no particular order, a few counter-points…

The European Parliament (EP) cannot decide where it meets – most MEPs would of course love to have just one seat – the deal on Strasbourg was sealed at a Summit in Edinburgh and it’s a matter for unanimity now, as the MEPs quoted in the piece should very well know.

It’s grotesque to claim that the EU in general, and the EP in particular, are ignoring the crisis. The Parliament has passed the first piece of legislation regulating bank bonuses in the immediate aftermath of the banking crisis (it got a mention in the Oscar winning documentary about the crisis, Inside Job for being the only elected assembly in the world to have bothered to do so at the time). The Parliament went on to pass a ‘six-pack’ of legislation on Economic Governance – hundreds of debates have taken place about the crisis with Commission and council constantly called to answer questions about it – only apparently not in the week the Mail’s journalist visited Brussels…

Some of the projects mentioned went ahead because the majority of MEPs voted for them, as a result of a democratic process. They might not be something those UK MEPs wanted to see, but they did take part in the process nonetheless. Indeed, the UK is outvoted extremely rarely in Brussels, and not once on an economic or fiscal matter.

Could the Parliament cost less, and be more efficient? Undoubtedly yes. But let’s flip the question back around: Why aren’t disgruntled British MEPs doing MORE to forge alliances with enough other MEPs to promote what they consider right, and stop what they consider wrong? How much power and influence did Conservative MEPs in particular lose by leaving the EPP, one could ask?

The criticism levelled at the EP’s Eurpal TV channel has some justification, but the figures used by the Mail are – surprise surprise – only part of the picture. The number of direct subscribers is small, probably disappointingly so in the eyes of the Parliament. However, the channel’s indirect traffic is far higher, for example through having programmes embedded in to third party websites. Regardless, a channel of this nature is never going to compete with X-Factor, and nor should it. Like our own BBC, Eurpal TV has a duty to cater to all, not just the switched-off majority.

Lastly, the article notes that “since the enlargement of the EU in 2004 (which increased the number of member states from 15 to 25), staff levels have grown from 3,946 to 6,245 — even though there are only four more MEPs than in 2004.”

The figures mentioned from the New direction study are correct, but the Mail (like the study) took figures of MEPs in July 2004 (732) and not from January 2004 (626). The staff mentioned serve the needs not of the MEPs, but of the EU’s citizens. The 2004 ‘Big Bang’ enlargement increased the population of the EU by over 100 million people, and brought in ten new members states, speaking different languages, with seven of them being former Communist states. It is obvious that a much greater number of officials are needed to service the millions new citizens: translation and interpretation and so on, let alone anything else.

There are many areas where the European Union is weak and could – should – perform far better. Organisations such as Nucleus exist to illustrate these shortcomings and suggest positive and pragmatic alternatives. The likes of this Daily Mail piece serve only to warp the debate, turning people away from discussion, and preventing the UK taking a lead in changing the EU for the better. James Slack and the Daily Mail may profess to despise the EU as it is, but they are doing an awful lot to prevent any positive progress.

Theresa May headed to the Commons yesterday with good news: the radical cleric, Abu Qatada, had been arrested, a deal had been struck with Jordan and his deportation was “imminent” – the only problem was they may have to wait months for it and it was still not entirely certain. She said:

“Deportation might still take time – the proper processes must be followed and the rule of law must take precedence – but today Qatada has been arrested and the deportation process is underway.”

In a burst of pettifogging which didn’t trouble President Sarkozy a fortnight ago, “proper processes” means more waiting and negotiating with the European Court of Human Rights (ECHR): simply putting Qatada on a plane was out of the question.

The debate then is polarised between the morality of ‘deport this terrorist now’ and the morality of ‘justice must be done to the letter’. It is a sign of the schizophrenia at the heart of the British character: at once utterly defiant and utterly liberal.

In the Telegraph leader column, Mrs May received “praise for her tenacity”, but held out little hope that Qatada will be gone anytime soon. On the other hand, the Guardian says that “justice rushed can be justice discredited” and that she is doing the “right thing” in attempting to secure more detailed assurances to satisfy the ECHR. Also, Tory modernisers will be happily smug that David Davis’s nemesis, Shami Chakrabati of Liberty, has backed May. However, the man himself has a column in the Times arguing that the ECHR urgently needs reform, suggesting we need new rules to stop Strasbourg hearing cases that should stay in Britain, that the court needs to take on less case work and it must work to restore its reputation in Britain.

So, can reform of the ECHR please the moralists on both sides? All will be revealed soon as this weekend nearly 50 states are descending on Brighton tasked with sorting out this court of a thousand sorrows. Ken Clarke, the justice secretary, will chair the meeting, at which government advisers say they expect most of the 47 members of the Council of Europe to sign up to UK proposals to make sure the court deals with only the most egregious violations of human rights.

Mr Cameron made reform of the reach of the ECHR a priority in January when he gave a speech attacking the way in which it had come to serve as a “small claims court” for cases from across Europe. The prime minister said: “The court should be free to deal with the most serious violations of human rights; it should not be swamped with an endless backlog of cases.” So far 150,000 cases are gathering dust in Strasbourg.

Both Libération and Jyllands-Posten are supportive in the continental media. They back the government’s belief that the court ought to intervene in more serious cases and not intervene in national decisions that don’t require external control. However, Britain needs allies to push through its key proposals. La Stampa, for one, recalls that the defence of human rights is “hindered” by the slowness of the judicial process.

Mr Cameron believes he has the support of a majority of Council members for change. A government official said: “We are confident that we will be able to reach a deal that addresses the issues that the prime minister made in his speech to the Council of Europe in January.”

If he is successful, he can parade an alliance in favour of pragmatic Europeanism. If he fails and his government is forced to wring its hands over Abu Qatada and the other dozen suspects he wants to get rid of, expect more euro-trouble on the backbenches – and renewed calls to pull out.

“The present crisis is irredeemable without major political changes,” Sir Peter Sutherland, ex-chairman of Goldman Sachs International and of BP, told a Federal Trust/Konrad Adenauer Stiftung discussion group last night (Monday). His solution: a new growth strategy, led by Germany, and a fresh drive to elect commissioners, above all the president, by 2014.

Two things struck one about the two-hour discussion: a remarkable degree of consensus, including Andreas Krautscheid of the German Banking Federation (BdB), that austerity alone is a dead-end economically and politically; and that Europe’s citizenry must be given political stakes in the process of recovery to overcome its growing hostility to “an alien superstructure” (Vernon Bogdanor).

We have reported before on how the EU centre-left – the German SPD, French PS, Spanish PSOE and parts of Labour – is talking, here in London, of a common programme to “Europeanise” economic policy and promote growth, jobs and “solidarity” in the form of redistributed wealth. Similar moves are taking place within the EPP (so officially by-passing the Tories). Monday’s meeting heard several calls for both groups – EPP and PES/S&D – to reach out to frightened, anxious, even disgusted citizens with plans to show how Europe can be “their saviour” as Stephen Haseler put it.

But it was Sutherland’s intervention that stole the show.

The ex-commissioner admitted that his ideas might never take flight and he was candid about their vagueness in some respects: notably on how slates of centre-right, centre-left and other pan-European politicians would be chosen as commissioners (perhaps via national primaries). It was taken as read that the next EC president should be elected – whether at the same time as MEPs in 2014 or immediately before or after.

Choosing “someone who speaks for Europe” is fraught in other ways. First, the current candidates talked about – Polish premier Donald Tusk for the EPP, Martin Schulz, German president of the European Parliament, for the PES – are hardly household names (in Schulz’s case not even within his own country). Second, would the successful candidate – merely by being elected – become de facto president of Europe ahead of Herman Van Rompuy who doubles up as head of the European Council and of the eurozone summits? Would s/he speak for the EU-27 (or -30) as well as for the EZ?

There are plenty of other questions, including the obvious one of how to provide more democratic legitimacy for the European Parliament when turnout in elections to it declines in almost direct proportion to its rising co-decision-making powers. And, of course, this discussion needs to get out of the salons of the EU political class and its satraps.

But both elements of it – a pan-European growth strategy and a democratic counterweight to the growing re-nationalisation of politics – are being sustained. Even here in corners of the UK where self-imposed semi-isolation is a recipe for irrelevance and powerlessness.