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I was in Ghent at the weekend and dropped in on Saint Bavo's monumental cathedral. It was Palm Sunday. The place bursts with Gothic extravagance; its soaring brick roof testifying to another era and the muscular confidence of the Catholic Church. By the time I was there the service was over and people, clutching fronds or sprigs of green, were embracing each other.

It was a peaceful ritual that belies the storm battering the Church. Across Europe, there is now a torrent of allegations against predatory priests and the abuse of children. In Germany, Austria, Switzerland, Ireland, Italy and the Netherlands people are emerging, with their often buried stories, and pointing their fingers at priests and bishops. One Catholic paper opined that this scandal was the "largest in centuries" to trouble the Church.

The questions facing the Vatican are these: Was its priority protecting vulnerable children or guarding the reputation of the Church? Were children systematically abused at Catholic schools and were paedophile priests shipped out to other parishes rather than being prosecuted?

There is the story from Ireland of a cardinal being present when two teenage boys were persuaded to sign oaths of silence. The priest who was accused of abusing them was never reported to the police and was free to abuse again.

It is impossible to know the scale of this, but across the world thousands of children may have been abused; their lives damaged, tormented by guilt and struggling to form stable, loving relationships.

The scandal is now knocking at the Pope's door in Vatican City. Before he was pontiff, he was Cardinal Joseph Ratzinger and was known as God's Rottweiler, the enforcer who instilled orthodoxy in the Church. He was also in charge of the Congregation for the Doctrine of the Faith and was the chief investigator, in charge of the office monitoring priestly misconduct.

Two cases have drawn the Pope directly into this crisis.

One involves the Rev Lawrence Murphy, a priest who worked at a school for deaf children in Milwaukee. Around 150 men with impaired hearing claim they were abused by the priest. Complaints against the Rev Murphy were made at a very senior level but why, it is asked, did the Pope, when he was cardinal, not take steps to ensure the man could not abuse again?

A second case concerns Peter Hullermann, a Bavarian priest who undertook therapy for paedophilia in Ratzinger's diocese; he was transferred to a new parish where, it is alleged, he continued to molest boys. The Pope says he had no knowledge of the decision to reassign him.

Vatican officials insist that as cardinal, Pope Benedict had "zero tolerance" towards priests who committed abuse and that he proposed a fast-track to de-frock them. They insist that the number of recent allegations are falling and that reflects some of the reforms that the Pope himself introduced.

The Church, however, seems totally unprepared for a global media bent on discovering what happened. They show no deference towards the institution. Lawyers in the United States talk of wanting to know "who knew what and when", echoing the pursuit of former President Richard Nixon. There is a search for documents covering the time when the Pope was a top Vatican official.

So, as more is revealed, more questions follow. That is the nature of these stories. One paper suggests the Pope knew that Hullermann would be able to return to pastoral work. It seems his name was found on a memo. So reporters demand answers as if the Vatican was the White House and there was a duty to explain.

In the face of this the Vatican has been defensive. Its paper L'Osservatore Romano said the allegations were part of an "ignoble attempt to strike at Pope Benedict". A spokesman is quoted as saying the Pope has not been weakened by this.

The Primate of Poland, Henryk Muszynski, says criticism of Pope Benedict amounts to a personal attack on the pontiff and an attempt to discredit the Church.

Yesterday, on Palm Sunday, the Pope was cryptic in his sermon. He spoke of Jesus Christ helping Christians "towards the courage of not allowing oneself to be intimidated by the petty gossip and dominant opinion".

There may be "petty gossip" out there but a Vatican spokesman has accepted that the "moral credibility" of the Church is at stake.

German Chancellor Angela Merkel has spoken of the need for "truth and clarity about everything that took place."

The biggest challenge is to provide an honest accounting as to what happened. Some are suggesting that outside independent lawyers should have access to Vatican files. Beyond that lies a question that eats away at Church doctrine. Abuse was not isolated. It was not confined to Ireland. It may well have been endemic and that demands an answer to the question "why?"

In the United States hundreds of priests were dismissed over a three year period. Ultimately the Church will have to explain "why" and then justify continuing with celibacy.

Meanwhile, the president of Switzerland has called for a sex-offender's list for clergy. In Vienna an archbishop is considering setting up a commission to examine abuse claims. Legal action is being planned in Italy against a priest suspected of molesting 30 children in 2001.

It is a story that has the potential to shake the Church; an institution whose buildings still define so much of Europe's public space as I observed in Ghent yesterday.

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It was the morning after the night before and I was riding an elevator to the 13th floor in the European Commission. Two men smiled at each other and one said "I hear Greece has been saved". "Couldn't be better," beamed the other, before disappearing into the vastness of bureaucracy. It felt like news shared from a distant front: "Bastogne has been relieved" or "Malta is holding out".

And then to sit at breakfast with the President of the Commission, Jose Manuel Barroso, who began by describing himself as "extremely happy". The single currency, in his view, was "one of the greatest achievements of European integration" and it had been rescued. "Common sense," he declared, "had prevailed," and he exhaled, an official satisfied.

And later to hear the President of the Council, Herman Van Rompuy, speak of the "courageous act" that had given birth to a deal. These encounters gave a glimpse of the largely unspoken fear that had rippled through the corridors of Euroland - that the crisis over Greece and its debt could threaten the European project.

The rescue of Greece grew out of a meeting between President Sarkozy of France and Chancellor Merkel of Germany. They are not natural soulmates. You don't get the impression that the French president warms to Germany, and Angela Merkel struggles with Sarkozy's unpredictability. Yet the two need each other. As one very senior official said today, "Europe requires Franco-German cohesion. You need them for European decision-making. They are still crucial."

So, after a week or so of sniping at each other, they traded. Merkel got the IMF involved.
It lessened the burden for the Germans and the IMF is in for between 10 and 20bn euros. If loans had to be made Sarkozy wanted the eurozone to be the dominant partner. He got that. The countries that use the euro will provide two-thirds of any loan. Although many senior officials are not theological about involving the IMF others are acutely sensitive at the very idea that the euro needs outside help.

The French president also got written into the draft a phrase that mentioned "the economic government of the European Union". It was the Irish, initially, that choked on the words. The Dutch and the British were not far behind. Officials emerged to say there had been "asymmetrical translation" and the word "government" was replaced by "governance".

In truth the Germans and French mean different things by the words "economic governance". The Germans want a tougher regulatory regime that won't tolerate cheats. The French want to see closer economic co-operation.

The immediate result of this deal is that Greece is given some space to breathe. It has to find 54bn euros this year, but already the cost of its borrowing has come down. One union leader has announced that strikes will be called off.

Yet no one imagines the crisis is past. Tax evasion is rife in Greece and the black economy accounts for about 20% of economic activity. Only this week in Athens a woman told me of having to hand over 100 euros to a doctor in a public hospital just for doing his job. The Greek economy is contracting and the cuts will only reduce demand further. The Greeks have not asked for funding so far, but don't bet against it in the future.

But after all the celebration over the relief of Athens some truths remain. as a currency. It is difficult having monetary union without fiscal union. That has not been resolved. Secondly, the differences between the economy of Germany and those of the countries in southern Europe have not been narrowed.

Germany has put down a marker that it will not accept a club where bail-outs become the norm. Angela Merkel has insisted that she wants a treaty change that will allow for tougher sanctions with perhaps the ultimate penalty of expulsion.

There is little appetite for this. One senior official in the Commission said they did not want to open up treaty negotiations because they feared the Conservatives in Britain - if they get into power - would use the negotiations to

So, after these days of in-fighting, the question remains "what kind of Europe does Germany want?" There is a recognition that the mood there is changing and that the national interest may often trump the European interest. Europe will have to adjust to that.

There is pressure on Germany to stoke up demand at home to help weaker countries in Europe with their exports but Mr Van Rompuy is one of those who doesn't go along with this. His analysis is unusually candid and clear. He believes it's unrealistic to expect Germany to boost demand at home. He thinks it is up to other countries to put their houses in order. At least half of Germany's surplus has nothing to do with Europe. There is also a culture of high savings.

Countries like Spain, on the other hand, are and the political class there knows that.

That perhaps is the biggest threat to prosperity and the so-called "European way of life"; poor growth. Where will the new jobs come from? For the next few years country after country will be reducing their deficits, cutting spending, reducing demand. So how will the long lines of 24 million jobless Europeans be reduced?

Already there is talk that, although European countries are supposed to reduce their deficits to 3% of GDP under the Growth and Stability Pact, it may not happen. The strains on civil society might be too great. So although Germany is demanding greater discipline there is reason to doubt that all the savage cutbacks will actually be implemented, for the crisis in Europe is growth.

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It is a tradition before a European summit that the German chancellor briefs the Bundestag before heading for the talks. Today Angela Merkel's words were pored over by European officials more than usual. The EU is facing its severest crisis for at least a decade and Germany is at the heart of it.

A former Belgian Prime Minister, Guy Verhofstadt, said yesterday, "incredibly, the public statements of some EU leaders have fuelled more anti-European sentiment in four days than all the Eurosceptics have achieved together in four years."

The pressure on Germany is to ride to the aid of Greece in a gesture of European solidarity. Germany is signalling that it will defend its interests.

Angela Merkel laid it on the line today: "cooking the books must be stopped," she said. There is no alternative to solid finances, she lectured the EU. "There can be no tricks," she said to applause. "All member states must go that way." She went on to remind her critics outside Germany that "the German people gave up a stable currency. Their trust can't be deceived."

What the German chancellor seems to be after is a new set of rules to govern the eurozone that will be enforced with much tougher sanctions. She said today that she would push for treaty changes. That is an indication of how serious she is. After eight years scrapping over the Lisbon Treaty there is no appetite for a new round of haggling over rules. Mrs Merkel knows that as well as anyone, but she believes the current system is not working and it has to be changed for the stability of the currency.

She took on her critics, who have been appealing to her to demonstrate she is a committed European. "A good European," she said, "is not one who takes spur of the moment decisions, but one who looks for long-term stability."

However, she did spell out in what circumstances Greece might be helped. If the stability of the eurozone was threatened and a state exhausted its ability to borrow then she conceded "we must act". But it would be as a last resort. In those circumstances she envisages bilateral loans from eurozone members combining with aid from the IMF. So that is the German position. They want the IMF involved plus bilateral loans from Europe.

The IMF involvement will be contentious. Only today officials were saying that calling on the IMF would "damage the single currency". The answer might lie in where the majority of the funds came from, the eurozone or the IMF?

Mrs Merkel pledged to work closely with France, but there are now deep rifts between the eurozone's key players.

What seems to be emerging is that Germany wants to use the crisis with Greece to bend the eurozone more to its own image, to ensure that, in future, it is a club that plays by the rules. Some are suggesting that Germany wants the club to play by its rules.

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There is now frenetic activity to resolve the Greek debt crisis at the European summit this week.

The French and the Spanish would like a pre-summit summit where the 16 countries which use the euro would try and reach agreement. The IMF hovers in the wings waiting to be called on stage. The Germans see the IMF as the way out of the crisis. There are reports that the French are easing their opposition to help from the fund. Others say that Berlin is prepared to back a general aid mechanism, but only with stiffer sanctions for those who break the rules.

As the arguments have swirled and the frustration has grown so have the undercurrents of accusation.

My eye was drawn to a remark that may not have been said. Its interest lay in the fact that it was given any currency at all. In Le Monde, President Sarkozy was quoted as telling a friend, in reference to the Germans, "they haven't changed". The paper suggested he was referring to their "supposed imperialism".

It all sounds very fourth-hand but, in the past two weeks, as Germany has dug in its heels over bailing-out Greece, something strange has happened.

If you read many of the comments you would suppose that the problem was not Greece but Germany. The leaders of France, Italy and assorted European officials have all been putting the squeeze on Berlin, rather than on Athens.

The Germans and Angela Merkel, in particular, have been insisting that the eurozone live by its rules, which include no bail-outs. She has raised the possibility that in the future - and after a treaty change - that serial offenders are expelled from using the euro. as saying that "countries which cheat in their public finances should help themselves". In some of the German media Merkel is being compared to Margaret Thatcher - another lady who was not for turning.

, says that "the Germans accepted monetary union in the 1990s on condition that the euro would be as strong as the mark, with low inflation, strict budget discipline and no bail-out for the weak". The Germans have been disciplined and have benefited from the euro, but they are not in the mood to help the Greeks.

It is this unwillingness to compromise that gnaws away at other European leaders.

The President of the European Commission, Jose Manuel Barroso, said he was sure Angela Merkel was a "committed European" which, of course, was a way of telling her to prove it. The Belgian MEP Guy Verhofstadt accused the German leader of no longer wanting a European solution. The Italian Foreign Minister Franco Frattini has piled on the pressure: "We have an institutional as well as a moral duty to intervene as far as is possible."

It is curious to know precisely what "moral duty" there is to help out those who bucked the system. What, of course, these statements are referring to is a higher European calling to back "solidarity" over all other considerations. The head of the European Central Bank, Jean-Claude Trichet, said "the euro is not a la carte. We enter the euro area to share a common destiny." It seems there are plenty of people in Germany who are less concerned with destiny and more focused on the health of their currency.

So the accusation is that Germany was once a consensually-minded European country - the good of Europe was always put first. Now critics see an economically-dominant country that will go it alone if necessary.

The Greek Deputy Prime Minister, Theodoros Pangalos, has accused Germany of making money out of Greece's misfortunes. "By speculating on Greek bonds at the expense of your friend and partner... some people are making money."

The Germans, so far, have resisted the big squeeze. Michael Meister, the spokesman for Merkel's parliamentary group, said "if France wants an agreement on aid for Greece at the summit then it should go it alone and supply aid itself and not expect Germany to do the same."

The Franco-German partnership has always been the key relationship in the European Union. I cannot remember - although I may be proved wrong - such a divide as exists at the moment.

Now it may be that some kind of mechanism to help Greece is agreed, but the EU has seen a tougher, more independently-minded Germany. Even if agreement is reached on short-term relief for Greece there is a wider problem with the euro. Many countries resent the fact that Germany is running a tight economy where growth comes from exports. Wages at home are kept down. Weak domestic demand makes it harder for countries to export there.

So the pressure will grow for Germany to loosen its policies and to defy its history. As one German professor put it, "it is part of the collective memory. Germans are for stability and austerity and not for deficit spending".

So a crisis that began in Greece has mutated to be about Germany and its commitment to Europe.

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How quickly should public spending be cut? Who would have imagined just a short time ago that this would be the central political argument in Britain. No political party disputes that the scythe must be taken out of the shed. The only question is when and what part of the public sector undergrowth should be hacked back. Sooner or later the debt mountain will have to be reduced.

It is an argument that, in different ways, rages across Europe. On the one hand are the austerity preachers. Clean up public finances, they urge. Slash the deficits. It is the only way to long-term economic health. And do it now.

On the other side are those who denounce this as "shock therapy". To cut now would risk tipping Europe back into recession. They regard their opponents as "deficit fetishists" who have failed to imbibe the lessons of history.

While politicians and economists argue this out another storm is taking shape on the radar. When the cuts come - as surely they will - they will present a profound challenge to what some call the "European way of life". In the firing line will be those large public sectors with their generous support programmes. Some politicians have sniffed out the battle lines ahead. This was the French Socialist leader Martine Aubry, after the first round in the French regional elections: "We do not want a policy that is destroying what France holds dearest - the social welfare model, equality and fraternity."

And so many countries in Europe - faced with competing with the nimble emerging economies - are having to ask what kind of public sector can they afford?

But let's return to the austerity club. Germany belongs. It insists debt is the problem. To those like Greece struggling to cover its deficit the Germans promote the hair-shirt; cut the budget, raise taxes, reform pensions, increase the retirement age, etc.

Now Greece has already promised spending cuts equal to 2% of GDP. Pay in the public sector has been frozen. Some allowances have been cut back. Its economy shrank by 2.5% in the final four months of 2009. Greek unemployment is rising. Some argue that austerity will only shrink the Greek economy further and so make it more difficult to pay off its debts. Others insist that the cleansing of Greece's public sector is the only way to make the country competitive again.

Other countries have embraced the age of austerity. Ireland, in the midst of a severe recession, has cut public sector wages by between 10 and 15%. Even some of the benefits targeted at the most needy have been scaled back. And still the European Commission believes more severe cuts may be needed. The Spanish have announced 50bn euros of cuts over the next four years. Portugal has an austerity programme. Yet there is also a sense that the cuts in public spending have yet to begin in earnest.

In Britain it is not clear where the axe will fall. Carl Emmerson of says "we face two parliaments of pain".

It is uncertain across Europe how unions and others will respond to austerity. There are almost daily strikes in Greece. The French have a general strike today. There have been protests in Spain. Jean-Paul Fitoussi from in Paris predicts "the pressure will impose terrible strains on the government and society for years to come."

Some see a perfect storm brewing: low growth, high unemployment, governments cutting spending and growing unrest.

Yet change is inevitable. The President of the European Council, Herman Van Rompuy, said "the vaunted European Social Model is unsustainable without higher growth and less wasteful public spending."

So a fierce debate is under way across Europe. What parts of the public sector can be sacrificed and what must be protected at all costs? What will the people accept as fair? In the wings governments are preparing to raise retirement ages and pare down pension schemes. Ministers know that caring for a rapidly ageing population may be unsustainable. Taxes are sure to rise. Some predict that the average rate of VAT will reach 20% and that governments will increasingly embrace stealth taxes to fill the gap.

In all of this lies the political battleground of the future. David Cameron last April promised to preside over an "age of austerity" if elected. What the politicians do not know - but is being tested in Dublin and Athens and Madrid and Lisbon - is how much medicine the voters will stomach on the road to economic health.

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In recent weeks the Greek Prime Minister, George Papandreou, has had his game plan. It is to play the veiled threat. He wants the EU to offer his country a concrete rescue plan that can be rolled out if Greece needs it. His hope - shared by others - is that the mere existence of the plan will tame the markets and lower the costs of borrowing. But as he watches the Union struggle to find consensus he makes his threat: I might be forced to turn to the IMF.

What he has been counting on is European horror at such a move. It would be a humiliation for the whole European project, say some. It would signal to the world we can't manage our own currency, say others. It would lower Europe's prestige. Did not President Sarkozy say only recently "we cannot let a country fall that is in the eurozone. Otherwise there is no point in creating the euro." The Spanish, too, recoil at the thought of turning to the IMF, with the United States its largest shareholder.

The Greek leader sprinkles his threats with a beguiling appeal to lofty European ideals. "We are a family of values," he reminds his potential backers, and we should be showing the world "Europe can act together in a co-ordinated way".

Suddenly it appears he may have mis-read the game. Germany has changed its tune. To the threat "I'll go to the IMF" the German response seems to be "please, make my day".

The euro-crisis is throwing up some new truths. Germany will be unsentimental about its currency. At its birth there was a "no bail-out" clause and Germany has a constitutional court that may well uphold that.

As to the cry of supporting European ideals, there are few misty eyes in Germany. Angela Merkel will defend national interest first. That is the message emerging from Berlin.

To those who see an appeal to the IMF as damaging it is surely too late. There is scarcely an economist out there who has not pointed out the inherent difficulty in running a single currency where there is monetary and not fiscal union. And the differences between the economies that share the currency are there for all to see. In recent weeks the EU has shown it lacks the mechanism to handle a crisis like this. The difficulty was on display last Monday, when Jean-Claude Juncker, the head of the Eurogroup, said "we have clarified the modalities" - and everyone, including the markets, was none the wiser.

In truth many have felt from the outset that the IMF route was the least problematical. It is certainly the UK route. Leaving pride aside, the cost of servicing Greece's debts would halve.

So we move forward to next week's economic policy summit. The Greek crisis is likely to dominate again. The IMF, either on its own or in partnership with the EU, may begin to appear the best option in the short term.

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This may be remembered as the day the single currency changed. In a speech to the Bundestag, Angela Merkel said it should be possible to expel a country from the eurozone. It would be an action of the last resort. It would only apply to a serial offender who repeatedly broke the currency's rules.

From its creation the euro was driven as much by politics as economics. Its founders were inspired by the belief that Europe's destiny lay in closer union. A single currency was a fundamental pillar of that. So figures were massaged to enable countries to join. When nations broke the rules, which they often did, it was overlooked. Everyone could stay in the club.

Only recently Olli Rehn, an EU commissioner, said "the euro is not only a monetary arrangement but a core political project of the European Union".

For the German chancellor, however, what is important is defending the stability of the currency, not solidarity, not a belief that the eurozone would inevitably expand. It might not. It might even contract. The German leader wants a treaty change to allow for expulsions.

Angela Merkel has injected some German steel into the debate over the future of the euro and the crisis over how Greece will reduce its deficit. The answer was not "rapid support" or "premature aid" that might not help matters in the long-run but would actually weaken the euro. The problem had to be attacked at its roots. "There is no alternative," she said, " to the Greek savings programme". She said "no country should be left on its own" - but the message from the eurozone's strongest country to Greece was brutally frank. What will actually happen if Greece can't cover its debts is now very unclear.

This was a flexing of German muscle. Ultimately a German leader has to defend the currency. To do other is to risk political damage. The German people were proud of a strong and stable Deutschmark.There is no appetite for rescuing countries who fake their accounts and run up massive debts.

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Ancient Greeks believed that dancing was a gift from the Gods. In the crisis over the euro much of the dancing is being done by EU officials. They want to put in place a rescue plan for Greece but they dare not use its name - a "bail-out". So the tip-toe, the preferred step in Brussels.

Over the weekend officials had been briefing that a deal to help Greece was at hand. When, finally, the two key players emerged they hid behind obscure language. These were not revealers but disguisers.

What the EU Monetary Affairs Commissioner Olli Rehn and Eurogroup chief Jean-Claude Juncker actually said was that if it became necessary co-ordinated action would be taken to help Greece. Bilateral aid would be available.

The announcements were slipped in, tagged onto sentences because, even after weeks of discussions, any help brings with it a host of political and legal problems. The EU clings to the hope that Greece can rescue itself. Time and again it was stressed that Greece had not asked for financial aid. Athens's austerity plan was praised as "bold and ambitious". Jean-Claude Juncker went out of his way to say that he believed that the odd bilateral loan "won't be necessary".

So the game plan is this. The EU wants to signal to the markets that it has a plan, a "framework", a "facility" to help Greece if it can't service its debt. Even if it won't define what that plan is it hopes that the financial markets will respond favourably, and so lower the costs of Greece borrowing. If Greece has to pay less then it might just trim its budget by 4% this year on its own and the euro crisis eases.

To those who might want to know a little more about this plan there were few answers. Indeed, shortly after an Irish journalist cut to the chase and asked for details, the two key officials were heading for the exits. We don't know whether any sums have been pledged, we don't know what form this aid would come in. It seems it will be some kind of direct loans from individual governments. Rather than disclose the options we were told that some "technical points" had yet to be decided and that a final decision would be taken by the European Council at an undisclosed date.

It is a useful rule of thumb that when officials use deliberately vague language and scurry away from further questions then behind-the-scenes difficulties remain.

The biggest obstacle is the word "bail-out". If any rescue can be interpreted as a "bail-out" then it may breach EU rules and there could be legal challenges to it in Germany. So the trick is to launder the money in such a way that it appears as a series of direct bilateral loans from other eurozone governments.

It may work, but a line will have been crossed. In order to stave off defaulting a country using the euro will have needed rescuing. Other countries struggling with large deficits will take note.

Some of these contortions could have been avoided by turning to the IMF, but European pride rules that out. As Olli Rehn revealed, what is at stake here is something even more important than the health of a currency. "The euro is not only a monetary arrangement but a core political project of the European Union."

Much of the opaque language is there to disguise something else: divisions between France and Germany. The German Finance Minister, Wolfgang Schaeuble, unsettled everyone when he countenanced countries like Greece being forced out of the eurozone. "We need tighter rules," he said. "That means, in an extreme case, the possibility that a country that does not get its finances in order at all leaves the Eurogroup."

Then the French Finance Minister, Christine Lagarde, put the squeeze on Germany. She hinted that the crisis with the euro would be eased if Germans spent more. "Those with surpluses could do a little something," she said. Now this is no small thing. She is asking a country to deny its lessons of history, to relax its financial discipline and start consuming in order to help out weaker economies. It might prove a hard sell to a German public brought up on the horrors of hyper-inflation.

So for the moment, during the euro's gravest crisis, everyone is dancing and hoping that somehow the Greeks manage their deficit on their own.

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A slap for the president. A warning note delivered to the Elysee Palace. That is how the results in France's regional elections are being interpreted. President Nicolas Sarkozy's party has fallen behind the Socialists. Some of his supporters sat on their hands. The turnout may well have been the lowest in French history. The second round will be held next weekend.

Even before the votes were cast, Mr Sarkozy had dismissed the results. "The vote... is a regional one, its ramifications are therefore regional," he said. On reflection, Mr Sarkozy said he would be "attentive" to the result.

The Socialists, of course, see it differently. The result, in their view, has changed the political landscape. It was the last poll before the presidential election in 2012 and the momentum is with them.

These are, however, mid-term elections when parties in power traditionally get a kicking. The president's poll ratings are at their lowest since 2007.

So do these results tell us anything as the West struggles to shrug off the grip of recession? Perhaps.

It is too soon to talk to a drift to the left in Europe as voters react to the fall-out from the banking crisis. In Germany the centre-right retained power. And yet the Socialist leader in France, Martine Aubry, detected a yearning for a social model that the downturn threatens. "We want to be reunited," she said, "with a society that is caring, fair, and where people can live together".

The view from France is that the voters are weary, disengaged, anxious and mistrustful of politicians. They are not so much angry but fretful about their jobs, their pensions and their way of life.

In politics, this is not a time for rhetoric. The public just won't buy into it. . He pledged to turn France into an economic powerhouse. Reforms tumbled from him.

He has been a leader in perpetual motion. A modern politician who defied easy labels. He was from the right, but invited left-wingers into his cabinet. He promised to slash public spending, but has . He worries about and speaks out for a "moral capitalism".

He still bristles with ideas and yet he seems to sense the public are not with him. Last week, he called for a "pause" in his own reform agenda. He even suggested that Parliament could "de-legislate" if it wants to.

Political space is being defined and filled by the recession. France has had an easier time than others. Yet unemployment is at 10%. The deficit is 8.2% of GDP, lower than many other countries, but will still have to be pruned.

Perhaps this is the moment for the fixers, the hole-pluggers, the deficit managers. Even US President Barack Obama shed his rhetoric soon after getting into the White House. He fell back on the auto-prompter. Vision got him into 1600 Pennsylvania Avenue, but downturns seem to be a time for serious, lower-key politics.

In Europe, there are big, fundamental challenges that leaders are struggling to address. Some officials are talking of a threat to the "European Way of Life". Without 2% growth, Europe faces years of relative decline. And no-one is predicting that anytime soon.

Countries are having to slash public spending to pay their debts. Will the crisis force a rethink of the welfare programmes that have been a hallmark of Europe's social contract? How will Europe compete with emerging markets that are nimble and dynamic? Will Europe have to sacrifice some of its social programmes to be competitive? How will Europe get its 24 million jobless back to work? The answers are set to define politics in the future.

In France, these were just regional elections and local issues played their part, but some analysts detect an insecurity, an awareness that a cherished "way of life" cannot be guaranteed. Martine Aubry said "we do not want a policy that is destroying what France holds dearest - the social welfare model, equality and fraternity." That is the pitch that we are likely to hear time and again in Europe - that the recession threatens something fundamental which must be protected.

Of course, the voters are still intrigued by the theatre of public life. Mr Sarkozy may have bridled this week at questions about his marriage to Carla Bruni, but he also revels in the glamour of power. You sense he can't wait to get to Washington later this month where he and Carla, and Barack and Michelle will spend some informal time together.

Yet back at home, two out of three French voters say they don't trust their president. It may just be that the public sense these are times which don't lend themselves to the dazzling, the frenetic, the blaze of activity.

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For anyone it would be a big ask. But for someone with little or no experience of foreign affairs to be tasked with setting up a diplomatic service and to expound foreign policy on behalf of 500 million people the hurdle is immense. Welcome to the world of Catherine Ashton.

She did not seek the job of EU foreign minister and she was not first choice. She emerged from the chrysalis of a euro-compromise and so became one of Britain's most influential women. She has just about completed her first 100 days. Some of the reviews have been harsh, with even a little lash of cruelty to them. She is dismissed as out of her depth and yet paid more than President Obama and Hillary Clinton.

Today she looked into the faces of MEPs at the European Parliament knowing that out there lurked rows of doubters.

"Europe is going through a phase of building something new," she told them. "Doing so is messy and complicated."

That is undoubtedly true. So what are the charges against her? They began early. She didn't travel to Haiti immediately after its destructive earthquake. She waited and only visited there last week. I have covered disasters; the tsunami, the Pakistan earthquake, Katrina to name a few. In my experience visiting officials are tolerated more than welcomed. Catherine Ashton said she didn't do "disaster tourism" but some held it against her.

Then there was the case of the meeting she missed. She was a no-show at the European defence ministers' meeting. Some of the ministers were open in their criticism. One said she was "noticeable by her absence". She was actually in Ukraine, a strategically important country for the EU.

There was, too, the case of the EU's new ambassador to Washington. He turned out to be EU Commission President Barroso's chief of staff. Questions were asked as to who was actually running the EU's foreign policy.

One of Catherine Ashton's main tasks is to build a diplomatic service or what the EU calls its . What it would entail was left surprisingly vague by the Lisbon Treaty and Catherine Ashton has to set out her plans at the beginning of April. In the meantime she is operating without a proper staff. But creating what is in effect a new institution has exposed her to some of Brussels's nasty turf wars. As one diplomat put it, "Brussels is a town that feasts on ill will".

One of the purposes of this diplomatic service is to bring some clarity and cohesion to the EU's foreign representation. Up until now the Commission had people abroad, so did the European Council.

There was duplication and the structure was baffling to outsiders. Catherine Ashton is, in effect, turning three jobs into one. She has taken over some of the Commission's turf - like development aid - and they don't like it. They are not used to ceding ground. Some of the bureaucrats are fighting back, determined to keep their hands on the budget and key appointments.

In the Parliament today there was some criticism. One MEP, referring to the turf battles, told her: "You mustn't be intimated by internal rules. Be a protagonist." Another called for strong leadership. It was all pretty mild.

What Catherine Ashton has going for her is that both MEPs and most of Europe's leaders have a vested interest in making her job work. The consequence of failure is not just humiliation for Catherine Ashton but recognition that the long years of arguing have failed to deliver a stronger voice for Europe on the world stage. Few want to see that. One senior official said to me "she can't match up to some of the foreign policy heavyweights" but she is skilful at finding consensus and has already developed good relations with Hillary Clinton and Russia's Sergei Lavrov.

The harder question to answer relates less to Catherine Ashton and more to the need for a diplomatic service. For even as she was fighting off her critics President Sarkozy was hosting a summit with the Russian President Dmitry Medvedev. An arms deal was pulled off, with the Russians getting helicopter-carriers, and there were discussions on muscular issues like Iran. France, like Germany, inclines towards a special relationship with Moscow. It was an old, familiar story of two powerful nations talking and finding common interest. Europe's nation states are most unlikely to agree to taking second place to a common European foreign policy.

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The first incentive for the EMF kite-flyers is that it would be a "European" not an "international" fund. It cannot be overstated how much European officials fear an IMF bail-out of Greece or other countries. It would not just be a humiliation; it would be regarded as a verdict of no-confidence in the eurozone. The German Chancellor Angela Merkel said: "We want to be able to resolve our problems in the future without the IMF". The Greek government, as a way of putting pressure on its EU colleagues, occasionally flirts with going to the IMF.

The second attraction of an EMF is that it would amount to a plan for when eurozone countries slide into trouble. One of the problems when Greece was struggling to finance its deficit was that the markets sniffed uncertainty over how to deal with the crisis. There was no agreed mechanism to handle rescues or bail-outs.

Since the idea was first floated in a position paper and then in comments by the German Finance Minister Wolfgang Schaeuble there has been a rush to support it. The European Commission is drawing up proposals and Angela Merkel said it was "a good and interesting idea".

But in the same comments as that endorsement, the German Chancellor was also aware of the immense difficulties in giving birth to such a fund. "The questions of course must be asked: Who pays in, how does one pay in....." All is to be argued over, but the fund will have to be substantial.

There will be those who will suggest that the fund is supported by not just the 16 eurozone members but by all 27 countries in the European Union. "That idea simply won't fly in the UK," said one British official. However the fund is dressed up it will be regarded as a bail-out body for the euro and British taxpayers are most unlikely to want to make any contribution towards rescuing a currency they have little enthusiasm for joining.

It is the recognition that any EMF would have far-reaching implications for the whole of the EU that led Angela Merkel to put down an early marker. "Without treaty changes we cannot found such a fund. So we will need a treaty change." It was a bold statement and some officials are already recoiling at the prospect. Arguments over the Lisbon Treaty lasted eight years. Outsiders criticised the EU for its obsession with structures and being inward-looking. There is simply no appetite - particularly with the French - for another round of treaty changes, but such a significant institution cannot be simply drafted in. It would need the agreement of all member states.

Beyond all of this lies perhaps the biggest problem. A fund could be seen by some countries as a ready-made bail-out facility. It might encourage irresponsibility. It was a doubt raised by Juergen Stark, a member of the top executive committee of the European Central Bank. He said it would create a perverse incentive for countries not to clean up their balance sheets properly.

"Every country is accountable for its public finances and therefore its debt," he told a German newspaper. "It would be the start for a system of financial compensation that could become very expensive, set the wrong incentives and finally be a burden for countries with solid public finances."

So some are talking about the need for tough rules and penalties for countries that breached the fiscal rules. The French aren't sure about that, but the Germans will be wary of setting up a fund that becomes a way of skirting around the current "no bail-out" policy. The IMF has shown in the past it has teeth and can be a powerful enforcer. There are doubts about whether European leaders have the spine for this. Will they act the enforcer? Or will the fund allow for fudge and drift which, of course, lies at the heart of the euro's current problems?

Behind this debate about a European fund lies a widely-held belief that if the euro is to survive in its present form there will have to be closer economic integration, and that brings with it all kinds of controversies.

The European Monetary Fund idea is recognition that the current system does not work, but as a plan it is fraught with difficulty. It is by no means a straightforward option and will come far too late to solve the crisis in Greece.

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REYKJAVIK: On Saturday Iceland is holding a referendum. Not that you would notice it. There are no posters on the walls of Reykjavik, there are no public meetings or protest marches. It is the silent referendum. And yet many say that the country's reputation hinges on the result. Icelanders must decide whether to support or reject a deal to repay Britain and the Netherlands outstanding debts from the failed Icelandic bank Icesave.

When the online bank Icesave failed the British government covered the deposits of those who had put money in the bank. Now it is seeking to get the money back from the Icelandic government. A mere £2.3bn.

London and Reykjavik - and the Dutch - have been haggling over the terms for months. A deal was on the table but then the Icelandic president stepped in. . He said it contained long-lasting consequences for the Icelandic people and there had to be a national consensus. A referendum was born.

This saga (and that is what it is) has continued until just a few days ago. Indeed the chairman of the Icelandic treasury committee said they had been discussing nothing else for weeks and months. It has been the longest debate ever held in parliament. The Icelandic government has agreed that money should be repaid - the question is at what interest rate. They have argued down to the wire. The British say their "best and final offer has been turned down".

Now, as the two sides negotiated in London, there were doubts that the referendum would go ahead. Nobody knew 24 hours ago whether it was on or off. But something curious has begun in the cold-grey light of late winter. Early voting. On Thursday on the outskirts of the capital I found long queues of voters. Some were taking advantage of early voting to prevent any last-minute cancellation of the poll. They wanted their voices to be heard and counted.

Every person in the line said they would vote "no". They would reject the British offer. One poll suggests 74% could vote "no". The result could even be higher.

In the voting lines there was anger and much of it was directed at Britain. "They're bullying us," was the common complaint. Some turned on Britain reluctantly but nonetheless many fingers were pointed at London. Even the Business Minister complained that London was trying to muscle them. Only recently the Icelandic foreign ministry described the British action as "disproportionate, aggressive and highly damaging".

What incenses the people is that London used anti-terrorism legislation to freeze the assets of Landsbanki, the bank that operated Icesave's internet accounts. They also object to the rate of interest that Britain is seeking on the debt. "It smacks of profiteering," one voter told me.

I sensed that a majority still supported repaying the UK, but only if the terms were fair. Some would like to see the whole issue taken to the European Court. But a significant number of people don't want any money repaid. A fork-lift driver at the port of Grindavik said Icesave had nothing to do with him. He did not see why they should have to pay for "reckless bankers". One man said the scale of repayment was equivalent to what Germany had to pay after the war and would impose years of misery on the Icelandic people.

The British view is simple. They're not bullying; they just want their money back under international agreements.

Now there are consequences for a "no" vote. The UK financial Services Secretary Lord Myners has said that in those circumstances Iceland would in effect be saying "it doesn't want to be part of the international financial system." is dependent on it settling up with the UK and the Netherlands.

For a moment here I closed my eyes and imagined I was back in Greece. The voices and arguments were similar. There was resistance to embracing austerity. Many believed the recession was caused by greedy bankers and that working people are paying the price. The flaws in Greek accounting and the irresponsibility of Icesave are conveniently set aside. In both countries there is resentment and hostility towards the EU. In Iceland the EU is blamed for poor regulation.

So a "no" vote here in Iceland is not just a rejection of a deal, it reflects, too, a growing anger with spending cuts, wage freezes, unemployment lines, the hallmarks of Europe's time of austerity.

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The time of shadow-boxing, of feints and jabs, is drawing to a close. The rounds left are few. Over the weeks ahead Greece must find billions to service its deficit. The moment approaches when it can either raise the money at a reasonable price, or it defaults or it is bailed out.

Even as all parties await the bell, the game goes on. Outsiders are still pouring on the pressure on Athens.

Their plans to reduce their deficit don't cut it. That was the view of a high-powered team from the European Union and the European Central Bank (ECB) which was in Athens last week. Their verdict: you'll miss your targets and you have to slash spending further. How do we know this? The Greek Economics Minister Louka Katseli, among others, has let us in on what he was told.

Even at this late hour others weigh in. The head of the 16-nation Eurogroup, Jean-Claude Juncker, says: "Greece must understand that taxpayers in Germany, Belgium and the Netherlands are not prepared to correct Greek fiscal policy mistakes". The French Economy Minister, Christine Lagarde, reminded everyone that the euro was built on the premise that "there would be no bail-out, because everyone had to play by the same rules and had to respect the same discipline".

At the end of last week the Greek Prime Minister George Papandreou sounded like a man who knew he needed to do more. "Will we let the country go bankrupt?" he asked, "or will we react?" So he may this week announce yet more austerity measures, perhaps a further cut in benefits or a hike in sales tax. He must hope he can squeeze his public sector some more whilst keeping the rioters at bay.

Some European leaders still hope somehow Greece can convince the markets that it can cut its deficit by 4% this year and avoid any rescue.

However, the believers out there are few. Giant hedge funds have placed their bets; the euro will drop further. In their view the euro's inherent weaknesses are not being addressed. Most senior European officials believe some kind of bail-out will be needed.

While they watch these latest moves George Papandreou is set to travel to Berlin on Friday to meet Angela Merkel. It is a key meeting. If Greece is to be rescued by Europe the Germans will have to be at the heart of it. The German people are against; it was their big fear when they gave up their beloved Deutschmark that they would end up bailing out the reckless.

However in the background rescue plans are being discussed. One possibility is that the German state lender KfW and France's Caisse des Depots will buy Greek bonds - but behind such a move will lie taxpayers' money. It could not be finessed away. The line will have been crossed; that weak countries that buck the rules will get bailed out. For even as European leaders demand that Greece do more, they reveal their final position. Christine Lagarde said it was "out of the question" that Greece should leave the euro. Angela Merkel has said that for the first time the euro is in a difficult position but "it will stand its ground".

If Germany's big banks step in, where will it end? Will it steady the financial markets or will the same institutions have to underwrite Spanish, Portuguese and Italian debt?

What about the marked differences in competitiveness within the eurozone between Germany, France and some of the southern European countries - how will that be fixed? Will Germany abandon its culture of thrift in order to stoke up demand and so help out other economies?

And that is where - like some massive storm detected on radar - a fierce argument lies ahead. Some of the battle lines are being drawn. On the one hand are those who say that there cannot be a successful single currency when monetary policy is determined for all and fiscal policy remains in the hands of the nation states. Jacques Attali, the founding President of the European Bank for Reconstruction and Development (EBRD), is the latest voice to call for one European economic policy. "So even if public opinion is for the moment against a single tax and fiscal policy for all of Europe," he said,"Europeans will have to go along at some point. Without it, the euro will not survive". He does not indicate how public opinion will be persuaded or whether such a fundamental change to the sovereignty of the eurozone states should be put to the voters.

Say Europe ended up with a single treasury, either via the back door or through popular will, what would be the impact on those 11 countries outside the eurozone? They would be part of a single market where some countries have common tax and spending plans. There would be potential for dangerous divisions. Angela Merkel, for one, is unpersuaded and sees the scope for problems. "It would be wrong," she said, "to have a coordinated economic policy for the Eurogroup while the others can do what they want, because we are of course closely linked to our other neighbours through trade".

Whether Greece is bailed out or not this fundamental argument lies ahead. It is out there, on the horizon.

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