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Some headed for the bus stations; others went to the wholesale food market; others sat outside banks and businesses. They were there to enforce a general strike. Those who wanted to work were shouted at and denounced as scabs and there were some scuffles.

Later a larger group of strikers headed down the Gran Via. They demanded that shops and businesses close. In one small food store some items were thrown on the floor until the police intervened. All along the street the shutters came down.

The strikers said that the crisis was caused by the bankers and yet it was the workers who were seeing some of their benefits disappear.

One small group of women opened a window and held up a banner with the word "liberty", insisting they wanted to work. They were met by whistles and jeers from the strikers. One man had to be restrained by police when he shouted that the demonstrators were little better than terrorists.

The union tactics were largely successful. Many of Madrid's main streets were effectively closed. The city's Atocha station was almost deserted. I saw very few buses running, but the early morning traffic was brisk and it was clear many people tried to go to work.

The government said electricity consumption was similar to a weekend.

The police, at one point, hemmed in a group of cyclists who they suspected were out to blockade the streets.

The strike seems to have been well-supported by the 17% of workers who belong to unions.

What's far less clear are the views of the majority of Spaniards, many of whom remain silent. I saw people close stores who clearly wanted to work.

When I spoke to the Economy Minister, Elena Salgado, she insisted the government would not back down. Indeed, if it became necessary to take tougher action to reduce the deficit, further austerity measures would be introduced, but she didn't expect that to happen.

And that is the view of most of Europe's governments - that the deficits have to be slashed. There is simply no alternative. The new orthodoxy is that cutting spending will eventually bolster growth and produce new jobs. Ms Salgado put her faith in job creation and in a leaner role for government.

Watching from the sidelines today are the financial markets. They will want to assess how deep and how widespread is the resistance to the age of austerity.

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I am in Spain, where unions are calling their first general strike in eight years. They oppose the wage cuts, the increase in the retirement age and the new labour laws that make it easier to hire and fire workers.

As Ignacio Fernandez Toxo, leader of the CCOO union put it in an interview with El Pais, "above all else the strike is about the prevention of new changes that affect the nucleus of the social protection systems". And John Monks, General Secretary of said "it's a fight to protect social Europe".

If that is the case, then this is a struggle for the future of Europe. Many argue that Europe will only be able to compete effectively in the global economy when it weakens its generous system of welfare.

It is unclear in Spain what support there will be for a general strike. For a start the impact is limited by laws that ensure unions maintain a minimum service. So up to 30% of local trains will be running at rush hour. And 40% of international flights will be flying.

But there is also great scepticism about the strike. Earlier today I was outside an unemployment benefit office in Madrid. It opened at 9.00 am but by 8.30 nearly 200 people were waiting in line. All ages were represented there. What struck me was how well-qualified many of them were. There was the young man studying art history; the actress; the tourism executive.

Many had sympathy with the strike, but none of them could see how the protest would change anything for the better. Many believe that Spain has to change, but there is a strong air of resignation.

When they find work it is often temporary, with poor wages. Over 40% of those aged between 16 and 24 are without work. Many others survive through the generosity of their families. The papers reported today that more than half of Spaniards in their thirties were not financially independent. Most of them live at home. It is a similar story in Greece and Italy.

(It is also the case that a significant number of young people have given up searching for work. They are called ninis; neither in work nor in study. They live off their parents and are referred to as a lost generation.)

But the pressure has lifted a little on Spain. The financial markets like its austerity package, its commitment to reduce spending further next year and the stress tests which removed doubts about the health of its banks. It is no longer on the critical list like the Republic of Ireland, Greece and Portugal.

But what will be the longer-term judgement of a lost generation? Will they remain passive and resigned? Hundreds of young Spanish people are emigrating. Emigration has returned to Ireland and a group of very smart Greek young people told me they had their sights on London, New York or wherever.

Many, of course, neither can nor want to leave. What will be the political fall-out of the years of austerity? Will some see this period as the price of staying in the single currency? Spain used the low inflation of the euro's early years to rack up debts. It is now committed to increasing competitiveness, in order to meet the strategic reforms that membership of the eurozone requires.

On Wednesday we should get some idea of how determined Europe's workers are to fight the cuts. But as the Spanish prime minister said recently, high unemployment in itself may trigger a crisis of confidence in Europe.

Note: An earlier version of this post contained projections on eurozone growth, which have been removed at the request of the consultancy which provided them.

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For a period it seemed that Ireland had escaped the worst. It was early into the recession. It was bold in slashing the budget deficit. It was praised for taking tough, unpopular steps.

Irish Finance Minister Brian Lenihan and Spanish Economy Minister Elena Salgado at EU finance ministers' meeting, Brussels, 6 September

Yet today Ireland is facing searching, serious questions. Is it sliding back into recession? Is its recovery losing steam? Is it getting to the point when an increasing share of its revenue is needed just to service its debt? Could Ireland default? Could the former Celtic Tiger be locked into a cycle of decline?

Hanging over Ireland is a question that hangs over many of Europe's countries. Is it asking the almost impossible to expect recovery while implementing deep austerity programmes?

Let's begin with the bad news. Ireland's economy shrank 1.2% in the second quarter. That was not expected. Its budget deficit at 11.6% is the highest in the eurozone. Unemployment is edging towards 13%. House prices are down somewhere between 35 and 50%. Wages are off 13%. Prices are falling. The Irish economy has contracted by 14%.

Then there is the cost of serving its debt. Ireland is now paying over 6% to borrow cash for 10 years in the bond market.

And if that were not enough, there is the unresolved crisis in the banking sector. The government has still not been able to say categorically how much it will cost to absorb Allied-Irish and all its debts. Will it be 25 billion euros or much higher? We are promised a "final figure" next month but it is proving difficult to assess the liabilities because the Irish property market is still declining.

Some fear that fixing the banking system could be close to 30% of economic output. There remains an underlying concern that the final figure for bailing out the banks could exceed the government's ability to pay.

As Barclays Capital Credit Strategists concluded: "Ireland's solvency concerns will not be put to rest this year".

It remains possible that Ireland could get to the same point Greece got to, where it proves almost impossible to service its debt.

But there are big differences between the two.

Ireland has financed almost all of its budget until the second half of next year. Its auction on Tuesday of 1.5 billion euros was over-subscribed. It has a breathing space.

Finance minister Brian Lenihan says the growth figures are not as bad as they appear. What he calls home-grown businesses have stabilised.

Ireland's economy does not need, it seems, the structural reforms of a Greece.

Even so the slowdown poses a big challenge to the government. There will be less revenue. The central bank governor has hinted at deeper cuts in the budget in order to retain market confidence. But further austerity measures may only weaken demand.

And that is the risk for Ireland: getting locked into a spiral of decline marked by falling revenues, a shrinking economy, and further spending cuts that only reduce further.

European officials are focusing on managing the next crisis in the eurozone but the current one is not yet over, despite optimistic words from some of Europe's leaders.

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"I pity the poor immigrant who wishes he would've stayed at home," sang Bob Dylan. In many parts of Europe the welcome mat for immigrants is being withdrawn. Anti-immigrant parties are making considerable gains at the polls and influencing power.

The latest is the Sweden Democrats. With over 4% of the vote they passed the threshold to enter parliament and now have 20 seats and potentially hold the balance of power.

There was nothing coded about the campaign of the Sweden Democrats. In one advertisement they showed a white pensioner being edged aside by burka-clad mothers in the benefits queue. Their leader, Jimmie Akesson, described Islam as the biggest threat to Sweden since World War II. In his and his party's view, Islam is not compatible with Sweden's values. In a country famed for its tolerance the party has benefitted from a backlash against what is seen as liberal asylum laws.

Of course, the party's share of the vote was still small, and voters rated unemployment as a more important issue than immigration. It might be possible to dismiss the vote as a one-time protest - if it weren't for what is happening elsewhere in Europe.

In the Netherlands the anti-immigrant Freedom Party was the third largest in the June elections. Since then the country has been unable to form a stable government. Polls suggest that if an election was held now Geert Wilders, the leader of the Freedom Party, would do even better. He campaigned on shutting down Islamic schools and banning face veils.

In Italy, the Northern League - which is the fastest growing party - has embraced a tough new law enabling authorities to fine and imprison illegal immigrants.

In Austria, the anti-foreigner Freedom Party captured 17.5% of the vote two years ago and is now pushing in regional elections for a vote to ban minarets and Islamic veils.

In Germany the former member of the Bundesbank, Thilo Sarrazin, has attracted large audiences to hear him discuss his book Germany Doing Away with Itself. His main critique is directed at Islam.

"With no other religion," he writes, "is there such a fluid connection between violence, dictatorship and terrorism as there is with Islam." He goes on to argue that Muslim immigrants are "unwilling or incapable of integrating into Western society".

The German establishment has disowned him; the polls and his book sales suggest that many German people agree with him.

The French parliament has passed a law banning the burka and niqab. There is a debate about national identity, and President Sarkozy believes he has the majority of the people with him in expelling the Roma.

So what has brought about this mood? Firstly, there is the economy. There are fewer jobs. Fewer outsiders are needed. But the economic downturn provides only part of the answer. In both Germany and Sweden the economy is rebounding strongly.

There seems to be a growing fear about identity, of living in a fast-changing society where people's known world recedes.

Much of this new populism is built on questioning whether Muslims can ever successfully integrate into the West. If they can't, so the argument goes, then Europe risks developing into separate, parallel communities.

Many Muslims argue that they are barred from fully integrating into society, and so assert their own identity.

What is the political fall-out from this? Firstly, immigration is rising up the agenda as a political issue, and the European left is struggling to find a message on immigration.

Yesterday, in the Sunday Times of London, the Italian Professor Raffaele Simone was quoted as saying "what has damaged the left most, in recent years, is its silence on immigration".

This new populist movement should neither be exaggerated - but neither can it be ignored. At its root it raises fundamental questions about the type of society Europeans want to live in. These parties tap into a desire for new arrivals to become "European". They are often suspicious of EU officials whom they regard as elite and distant from the concerns of ordinary voters.

Hugo Brady of the Centre for Economic Reform said that "immigration has stepped into the post-Lehman Brothers world and the EU is probably seen by ordinary people as more part of the problem than the solution".

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Arguments over the expulsions of the Roma from France have overshadowed a European summit in Brussels. There was a fierce row over lunch between the French President Nicolas Sarkozy and European Commission President, Jose Manuel Barroso.

The French leader accused the Commission of having wounded France: "I am the head of state, I am the French President and I can't let my country be insulted."

His anger relates to comments made two days ago by the EU's Justice Commissioner Viviane Reding, in which she said that the removal of the Roma reminded her of actions taken during World War II.

The French president described the words as "shameful" and "disrespectful. He said he would not allow his country to be the victim of "outrageous" insults.

He said none of Europe's leaders were prepared to accept such language. Chancellor Merkel had called him to express total solidarity," he said. "Everyone here," he later told a news conference, "was deeply shocked especially given our wartime history. These words were deeply wounding and were insulting to my fellow countrymen."

But afterwards a spokesman for Mr Barroso challenged Mr Sarkozy's version of events. "President Sarkozy," he said, "does have a case to answer. No one supports President Sarkozy on the substance of the issue. There was a huge row over lunch with President Barroso insisting he had a job to do upholding EU laws over the free movement of its peoples."

The EU will continue considering legal action against France. And President Sarkozy will continue dismantling the illegal camps. "We do not accept the existence of shanty-towns which are degrading to those live in them and nearby," he said. He promised that French laws would apply to all and would not target particular ethnic groups.

That has been the main charge of his critics. The head of the European Commission said again today that discrimination against ethnic minorities was "unacceptable."

Mr Barroso did say that he regretted some of the language used but implied that both Viviane Reding and the French president had made inappropriate remarks. This was a reference to a jibe by President Sarkozy who noted that Ms Reding came from Luxembourg and that he would have no objection to that country taking in the Roma.

So where now? The French believe that there is a real problem that has to be handled on a European basis and they are looking forward to proposals from the Commission.

Some say that a European strategy to help the Roma integrate into Romanian society and which was effectively enforced might enable President Sarkozy to say there was enough progress and to stop the expulsions.

But this was a deeply-felt and not a synthetic row. It pits an EU chief determined to fight for Europe's policing of its laws against a French president equally determined to uphold French law as he sees it. The free movement of people within the EU does not in his view entitle people to occupy territory illegally.

French government spokesmen are also hinting that this row "will only widen the gap between the French people and the European institutions".

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Yesterday the EU's Justice Commissioner Viviane Reding said that France's policy of expelling the Roma was a "disgrace" and compared it to what had happened under the Nazis. "This is a situation," she said, "I had thought Europe would not have to witness again after the Second World War".

Even though the Elysee Palace is obviously angry it is not wanting to escalate the row. Instead it says it wants "calm dialogue" and to avoid getting drawn into what it calls a "sterile controversy".

Viviane Reding seems to have been irritated by criticism from MEPs that she had not been tough enough initially. She also felt she had been misled by French ministers.

She was clearly furious about the existence of an internal French interior ministry memo which specifically mentioned that in dismantling illegal camps the Roma were the priority. She felt the memo undermined earlier French assurances and she interpreted the wording as targeting an ethnic minority.

That memo has now been replaced by a later document, signed by the interior minister himself, that makes no mention of the Roma.

President Sarkozy is most unlikely to back down. To do otherwise would be a personal humiliation. It might also be good domestic politics to stand up to a European official.

France will insist it has broken no European laws and has the right to remove Roma on the grounds of security. It will also challenge the EU as to why funds earmarked to help the Roma integrate in Romania have not been fully used.

Michel Barnier, who is a European commisioner and French, tried today to calm down the dispute. He pointed out that the Commission was the guardian of European treaties. He said the commissioners would take a decision together as to whether France had infringed the treaties and should be subject to legal action. No decision had yet been taken, he said.

Michel Barnier said that "the treaty enshrines certain values which are extremely important for all of us, and certain countries who were at the root of European construction inspired these values - not just France - and we're proud of these and we need to, we have to, respect them".

But he also said that "many governments, not only the French government, are having to deal with very complex situations involving integration - requiring integration.

"And I don't think we can oversimplify the situation and just characterise this in a few words - these governments have to deal with integration in the context of their national legislation and in compliance with the treaties which they have underwritten and subscribed to."

If this dispute were to end up before the European Court of Justice it would turn on the interpretation of European treaties. The French would argue that while they have signed up to the free movement of peoples within the EU, they have the right to restrict movement on the grounds of security.

The line that is likely to be adopted by the French government was summed up Xavier Bertrand from the UMP, Sarkozy's party.

"France respects European law," he said, "but France lives by the law of the Republic and the decisions regarding the dismantling of illegal camps were taken judicially and French law takes priority in France".

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The German town of Freising is overlooked by a hill called the Domberg. It is dominated by a twin-towered Romanesque Cathedral. Just off to one side is a museum to Pope Benedict.

A short while later the young man is in a seminary. His face is lively, absorbed, immersed in books. He is the stand-out scholar of his generation and his peers know he is destined for Rome.

The gallery of pictures is thin. Joseph Ratzinger left few visual traces as he rose from Bavarian priest to become the leader of the Roman Catholic Church. He was and remains, at heart, an academic. Recently he told Professor Wolfgang Beinert, his former assistant, that his times teaching had been his "most important days". "I was at my prime," he said. Beinert's view is that the Pope remains "a professor down to his boot straps".

When he was elected Pope in 2005 the crowd began shouting "Benedictus! Benedictus!" He recoiled from the adulation. "I am not the main event," he said. He was a reluctant pope who, before he was chosen, had confided to friends that he longed to retire to Bavaria and to walk the hills.

But this elderly academic, who one ambassador likened to a "grandpa", presides over a Church buffeted by scandal. On an almost daily basis there are revelations of priests abusing children. Last Friday a dossier was released in Belgium cataloguing the grim details of abuse of children as young as two. In Belgium they say this is the Church's "Dutroux", referring to a paedophile found guilty of six rapes and four murders.

And from the sidelines, and makes the charge that perhaps 100,000 children have been abused.

In a square near the Pantheon in Rome I meet a priest. He is an older man, familiar with the ways of the Vatican. He has no doubt in his judgement. "I think," he says, "it is the most serious crisis since the Reformation". In 1517, when Martin Luther nailed his theses to the church door in Wittenberg, it shook the Church to its core and ushered in the Protestant Reformation.

Time and again in Rome and elsewhere I found people asking the same question: "Is the Pope up to the challenge?"

Pope Benedict is not reclusive, but he has lived simply. He plays the piano, especially Mozart. The British Ambassador to the Vatican, Francis Campbell, says: "He lived outside the Vatican walls... in an apartment with a cat, a piano and his books. In the months after he became Pope, one of his neighbours says she saw him return to his flat to see the cat and play the piano."

Ambassador Campbell says: "He is one of the greatest intellectual minds to have inhabited the papacy for two to three hundred years. He is a member of the French Academy."

Joseph Ratzinger is conservative by instinct. "My heart beats Bavarian," he once said. During the 1960s he favoured reform, finding the Church too bound by rules, but the student riots of 1968 changed him. According to Beinert, his assistant, Joseph Ratzinger saw in the protests "an atheistic world, which lacked any form of godliness or spirituality". "I stared into the ugly face of atheism," Ratzinger said later. Beinert says "he switched back to the more traditional values of the Church and fighting secularism became his mission".

Later he became the prefect in charge of one of the most important bodies within the Church, . It is the successor to the Inquisition. Ratzinger was the enforcer, uncompromising, cracking down on dissidents within the Church. It earned him the name God's Rottweiler.

As Pope he has taken a strong line against women priests, contraception and homosexuality. He has had his controversies, like when he quoted a Byzantine Emperor who characterised some of the teachings of the Prophet Muhammad as "evil and inhuman". He later claimed that his use of the quotation had been misunderstood.

But the sex abuse scandal is eating away at the Church's moral authority. In parts of the world the revelations have driven away congregations. In Ireland, where almost a third of the population once greeted Pope John Paul II, they are struggling to sell tickets to see Pope Benedict in London.

While a cardinal, he took steps that were intended to signal zero tolerance of sexual abuse. "He was the first to see the seriousness of the issue," said Ambassador Campbell. But Cardinal Ratzinger wanted investigations to be handled internally and for priests to face canon law, rather than criminal prosecution. He remains very protective of the Church's power.

knows the Pope. He says of the abuse: "These were criminal acts, covered up by many, not just by individual bishops. The Pope himself wrote a letter ordering the matter to be dealt with internally by the Church.

"The Pope should apologise. He should say 'mea culpa'. The whole thing reveals a wrong attitude towards sexuality. But also the wrong attitude towards authority. The Church needs to be more transparent, open and democratic. We need a more open Church - not just a Roman system of imperial power."

I meet Monsignor Mark Langham at . He is unusually candid. "As a priest, I have had my confidence shaken," he tells me. "It is difficult for the Church to get hold of this issue." But, he adds, the Holy Father "has made it very clear that we can't accept this sort of behaviour".

The Pope has apologised and has met victims of clerical abuse. Earlier this year in Malta he was said to be close to tears.

Hans Kung insists the Pope has the means to radically reform the Church. "The Pope is more powerful in his Church than the president of the United States is in his country," he says. "The Pope could change overnight the rule of celibacy and it would be changed. But if he does not want to change? Then nothing happens."

Monsignor Langham disagrees. "People misunderstand what the Pope can do," he says. "He can't change the whole agenda. The Church has a much deeper, and a very proud, history of faithfulness that makes it very hard to change. This Pope and any future Pope are very unlikely to bring about change. Their area of movement is very limited. It is not that he can say something and it is done. The tradition of the Church does not allow him to do that."

And personally the Pope is wary of reactive change. He does not want a Church that trims its message to suit the times. His time-frame is the span of centuries. Francis Campbell notes that the Catholic Church is "the world's oldest organisation". "Perhaps the Pope's attitude to change is that we have got something right ... if we are still here today?" he asks. The Pope's preoccupation is with the future of the West and how secularism is undermining its values.

In Rome I stand on a rooftop with an Opus Dei priest. There are magnificent views of the Eternal City. He points out some of the 400 churches and seminaries. He takes comfort from the fact that most of the abuse cases go back more than 20 years but that does not answer the questions "why?" and "why so many?".

Back in Bavaria I sit down with one of the Pope's former students. They are friends and still meet. He gives me a signed picture from the Pope. Within 10 or 20 years celibacy will be dropped, he tells me. It does not exist within the Eastern Catholic Church. I express surprise. It is inevitable, says the priest, with the wave of a hand. I wonder aloud whether the Pope might contemplate such a change. "With this Pope, it's impossible," he tells me swiftly.

Beneath the surface, there is a clamour for change. Robert Mickens from says that increasingly parishes are going their own way. Unofficially there are women priests in the US. He raises the possibility that the Church may even split.

I drive along the Appian Way to the Albana hills and Castel Gandolfo, the Pope's summer residence. The Pope is holding his Wednesday audience in the town square. There are people from all over the world. Some are dressed in traditional costume. Some have lugged statues of Mary from their local churches so that they can be blessed. There are brides in extravagant wedding dresses who hope that merely being in the presence of the Pope will bless their marriage.

As the audience begins, messages are read out in different languages indicating some of the groups who are in the square. When their names get mentioned they let out a cheer and the Pope waves to them. Afterwards several people said they liked his smile, his humility.

In the early autumn sunshine it is tempting to believe that the Church - with its long view of history - could emerge from this scandal unchanged. But then I recalled the Pope's Bavarian friend who said to me: "We can't find the priests. There are dioceses here that have no new candidates for priesthood. The churches are empty."

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BERLIN In the great argument over whether spending cuts might choke Europe's recovery, German Finance Minister Wolfgang Schaeuble says that reducing budget deficits is the foundation for sustainable growth.

Here is the transcript of my interview with him, conducted in English:

Q: Is the German economy a "small miracle" or is the outlook still uncertain?Ìý

A: It is not a miracle, but it is better than expected. But you have to remember in 2009 the economy shrank by 4.7%. On this point it [the economy] is not as strong as some people think. The second quarter at 2.2% [growth] is a lot, nevertheless we are still below the level from before the crisis.

And of course our economy is well-structured, a good mixture between big, small and medium enterprises. This is very important for Germany and of course our way of deficit-reducing is growth-friendly. For Germany our way of very careful, limited, balanced deficit reduction is one way for sustainable development, therefore we are on the right way.

Q: The recent rebound in the German economy - will it last, because some of the recent data suggests it is already weakening?

A: I don't expect growth of more than 2% in the coming year. The German economic recovery will last, but not with the figures of the second quarter in 2010. It's a little bit of a special situation, but in the long term I expect growth between 1.5% and maximum 2%. Next year we will be close to under 2%.

Q: With the German economy doing quite well, why is there still a need for an austerity programme here?Ìý

A: It is not an austerity programme.
Ìý
Q: Well, it is spending cuts, 80 billion euros of spending cuts.
Ìý
A: Yes, of course 80 billion in four years... it's not as dramatic as it may seem. Our programme fits in with the EU Stability and Growth Pact [to bring deficits down to 3%]. It's what we call a growth-friendly deficit reduction and that is a [foundation stone] for sustainable growth.

Q: But is part of the reason why you are doing it, to set an example to other EU countries?Ìý

A: No, we are not the teacher for Europe. My principle is that every country has to do its duty... We have to defend the stability of the euro and we have to be in line with the European Stability and Growth Pact. And we are doing it. Not more, not less. And if we do so, we can ask our friends and partners to do the same, not more, not less. We are not the teacher of Europe.

Q: You say you are not the teacher of Europe, but Germany is sending out a message that other countries should not live beyond their means.

A: Germany sends out the message that in principle a balanced deficit reduction is not against sustainable economic growth. That is our message.
It means what all Europeans had in mind when we where all together in Toronto at the G20 summit... to say that deficit reduction or exit strategy as it was mentioned in the G20 policy since two years, is the right way.

Of course, you have to make it the right way to fit it into the special situation in any economy, but in principle it's necessary and it's a precondition for sustainable growth. I think the decision of the US is a little critical, but it is not up to me to decide it. For Germany our way is the right one and we won't destroy growth. It's the opposite. Our policy is very good and one precondition for a good economic development.

Q: And what do you say to those who argue that by adopting spending cuts and with other European countries cutting their budget deficit at the same time that it risks choking off growth, just at a time when so many economies are vulnerable?

A: No, the German example is proof it isn't necessarily so. In Germany our policy of a sustainable fiscal framework is a good precondition to increasing internal demand. Internal demand, consumption and investment are all increasing. We have had the highest figures of imports in Germany in the history of the Federal Republic of Germany, therefore what we are doing is not against growth, not in Europe, not in our global responsibility, but it's in favour of growth, sustainable growth. Ìý

Q: In your view you don't strangle, cut growth?

A: In principle no. Of course, it is important to find the right way. If you have such a crisis like Greece you have no alternative to make serious cuts, which hit for a limited time economic growth, but there is no alternative, this is what you can see in Greece.

If you have a situation like in the UK, I think the British government is on the right way. I have full respect for what Cameron, my friend, is doing. We in Germany can prove it is not in principle contradictory.

Q: And how sustainable is growth in Germany if other countries within the eurozone and the EU begin reducing demand with budget cuts all at the same time?

A: As long as all do it in the balanced way I don't have any concern about this. The opposite, the major threat, would be if they wouldn't do it... No, I think if we all fulfil what we all have promised...we will not harm economic and sustainable economic development, but the opposite. We will build one unavoidable precondition for our sustainable economic growth.

Q: You talk about the need for greater competitiveness, but in order for countries like Ireland and Spain to become competitive they have to reduce wages for years... they will have to endure severe deflation in order to become competitive with a country like Germany.

A: Maybe Greece will have problems. I hope Ireland not, but of course I would make a clear distinction between stability and between deflation. If you have too high a deficit you have to reduce it and maybe sometimes it is unavoidable to take for some limited time some economic disadvantages.

The best way to avoid this and to defend stability [is to reduce the deficit] as soon as possible, but even Germany failed and therefore we have to reduce. It's not too dramatic, we can do it without damaging our economic development, growth, but we must remain careful. One of the main reasons of the crisis... was the public deficit all over the world, in Europe and also in Germany.

Q: Has the crisis in the eurozone passed, or do you think there are still risks?

A: There are still risks, but I think we are on a good way to manage the risk.

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In Paris and other French cities the protesters have left the streets. The unions claim 2.5 million people marched against increasing the pension age from 60 to 62. The government put the figure at just over one million. But everyone agrees that the scale of the protests has increased since June.

For President Nicolas Sarkozy his pension plans are a key cost-cutting reform. He has said the basic elements of the proposed law are non-negotiable. After today, there are likely to be further protests and strikes. The expectation is that Mr Sarkozy will eventually get his way, but he will probably have to offer some concessions.

The protests demonstrated the depth of feeling across France against changing pensions. Many protestors told me that they felt raising the pension age challenged the French way of life. Some of the placards read: "Let's refuse austerity plans."

And later this month Mr Sarkozy is expected to announce £35bn of further spending cuts. Now he is likely to reduce costs by ending tax breaks and reducing the numbers of civil servants. What most commentators agree on is that the French people will oppose any fundamental changes to their basic benefits. The president has little room for manoeuvre.

There was further embarrassment for Mr Sarkozy today. Members of the European Parliament attacked France for its plans to deport Roma (Gypsy) migrants. Some MEPs said the policy was "unacceptable". But Mr Sarkozy was spared criticism from the European Commission. The European Commissioner for Justice Viviane Reding said she was satisfied by France's explanation for its actions. She said that money was available to help the Roma but "the money is not being used in order to solve the problem".

For the French president these are crucial weeks that may well determine his political future.

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• - What's this?

There are whistle-blowers, bag pipists, horn-blowers and the pounding rhythms from the speaker systems. Stretching down the boulevard are the large balloons of unions like the CFE, CGC and the CFDT.

The atmosphere is good-humoured, almost carnival. But this is a very serious day for the French unions.

They have to build on the turnout they got last June. They said they got a million protesters on the streets then. And numbers matter. A million people or less today and observers say the government would claim the momentum had drained from the protest.

The crowds are dense, but they are mainly members of unions so far. Amongst the people I have spoken to there are doubts as to whether they can defeat President Sarkozy on this. One union official told me "if the people don't back us we'll lose".

So in a very real sense a key struggle is taking place on these noisy streets that will decide whether the French president can implement one of his key reforms. It will also play a large part in determining his political future.

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The President of the European Central Bank, Jean-Claude Trichet, who presides over this new orthodoxy, warned that "postponing cuts in the public sector... could be very dangerous".

For some countries like Greece, the Republic of Ireland and Spain, the age of austerity is well and truly here. For others like Germany, France and Italy the icy winds of prudence will only start blowing next year.

The conversion to budget-cutting was driven by fear. Countries with large budget deficits were haunted by what happened in Greece. There a country which had lied about its finances was turned on by the markets. They pushed the cost of servicing Greek debt so high that the country had to be bailed out by the EU and the IMF. Greece was in effect bankrupt and it shook the eurozone to its core. The future of the single currency, the euro, was seen to be at risk. Other countries with high deficits were encouraged and, in certain cases, muscled into announcing austerity programmes.

So in Greece public spending this year is down 40%. The Spanish are trying to reduce their budget deficit to 6% of GDP by next year. Ireland's economy has shrunk 10% as it struggles to tackle its deficit. The Italians will soon face austerity cuts put at 24bn euros (£20bn).

Not all European countries, however, share the same outlook. Firstly, there are the conviction cutters. Foremost amongst them is Germany, which is almost evangelical in its approach, telling other European countries they must not live beyond their means. The German Finance Minister, Wolfgang Schaeuble, warned that "governments should not become addicted to borrowing as a quick fix to stimulate demand".

Then there are those who became cutters out of necessity. Greece, Spain and Ireland saw the cost of raising money in the bond markets rise. They all knew how the script went. If the markets doubted their determination to slash their budgets the spreads in the bond markets would widen, their credit ratings would slide and it would become harder and harder to finance their debt.

Then there are reluctant cutters like France. President Sarkozy hated the very word "rigueur". Paris, longer than others, doubted the wisdom of cutting whilst recovery was so fragile. Now it stands ready to unveil its own 40bn-euro package of cuts. Why? France is on notice that its triple A credit rating could be lost unless it reduces its spending.

So austerity has arrived, but is it working?

Ireland was first up to take the medicine. It has been called the "poster boy" for deficit cutting. It has reduced spending, cut benefits and salaries with remarkably little resistance from the unions or the Irish people. The budget deficit has come down from 14.3% last year to 11% this year, but at a huge price. Public sector salaries have fallen by 13%. The economy has contracted. Unemployment is now 13.7%. Prices and rents are falling. Ireland is experiencing brutal deflation.

Its problems are deepened because it is still trying to sort out the bad debts inside its banks, particularly Anglo Irish. Some put the cost of recapitalising its banks as high as 50bn euros - that is almost a third of the size of the entire Irish economy.

A measure of how the pain hasn't worked is that some in Ireland are now debating whether there is a case of crying "enough" and defaulting on its debts.

In Greece the government has been much more rigorous in slashing spending than many thought possible. Officials from the IMF and the EU have been full of praise. Civil servants have seen salaries fall and perks disappear. But unemployment is rising sharply. Households and businesses remain deeply pessimistic. Few believe that despite all the hardship it can avoid defaulting down the road. Others believe the cuts have gone too far. Hans-Werner Sinn from the IFO Institute in Munich writes that "it is impossible to cut wages and prices by 30% without major riots".

In Spain public sector wages have been cut and infrastructure projects postponed or abandoned. Spain is cutting spending when unemployment among young people is running at 41.5%. Some say that reducing demand with so many out of work flies in the face of all conventional wisdom. There are some signs that the Spanish government is wobbling over the extent of its austerity package. It recently announced an extra 500m euros for infrastructure projects next year.

Despite all the measures taken the risk premiums for Ireland and Spain actually increased in August.

For France the challenge begins now. This week its reforms will be tested on the streets, when the unions protest against the plan to increase the retirement age from 60 to 62. President Sarkozy has said the changes are non-negotiable. But in France governments have buckled before in the face of street protest. The problem this time round is that investors will be watching for weak nerves. A concession on pension reform could indicate that the government will lack the will to enforce the 40bn-euro austerity package.

Theo Panos of Trafalgar Asset Managers said "austerity is the key and it is probably only in the third or fourth quarter that you will be able to see how the programmes are going".

In Europe growth is rising. Indeed it is rising faster than many predicted. But much of that is due to Germany. If demand for German exports were to slacken later in the year Europe's growth would fall away and then the key question would surface once again. Is it wise to cut spending when the economies are so weak? Only recently the economist Nouriel Roubini remarked that "there is a significant risk of double-dip recession in the US... and many European countries".

The people's verdict on austerity will soon be delivered. Europe's unions are planning a day of protest on 29 September. The union leaders have two arguments: that it is crazy to reduce spending at this time and that it is unfair to focus so many of the cuts on the public sector. Their argument is the problem started in the banks and has been transferred to the government's books and ministers are now passing it on to the public sector. Complaints of unfairness will dominate their banners.

So it may seem that the argument in Europe has been won by the cutters; austerity is in vogue. But, so far, deficit-cutting has not solved the problems and if growth slackens as the year fades governments will be under pressure to review their plans.

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The ringmaster at the show was none other than the Libyan leader, Col Muammar Gaddafi. He has just left Italy after a whirlwind 48 hours that some say degenerated into a Roman circus.

The reason for the visit was to celebrate a friendship accord that had been signed between Italy and Libya in 2008. It was an important step in Libya and its leader coming in from the cold.

After the past few days some are having doubts about Italy's new-found friend. Most of the time Gaddafi and Silvio Berlusconi, two great politician-showmen, vied with each other for attention. There was Gaddafi out in Piazza Navona, downing a cappuccino and a gelato before buying a fistful of rings from African street-traders. Berlusconi hosted a dinner and told his guest "if you behave well I'll sing you a song". The Libyan leader left before the dessert, although the dinner went on until three in the morning.

None of that raised an eyebrow. But a modelling agency was hired to find several hundred young women to sit it on a Gaddafi lecture on Islam. They were paid between 70 and 80 euros to be there. Gaddafi told them "women are more respected in Libya than in the West and the United States". "Islam," he went on, "should be the religion of the whole of Europe". Three of them were apparently persuaded and converted.

Suddenly Italians began taking offence. One politician said that "Europe's Christians should retaliate. Gaddafi should not be allowed to come here and speak to us in this way". Another said this "Islamic drive" should be confined to Libya. Italy's Minister for Equal Opportunities, Mara Carfagna, was unusually silent. The Catholic Church was irritated and embarrassed, wondering whether they would get a crack at a similar audience in Tripoli.

Others felt Italy had been humiliated. Sure it values the commercial opportunities now opening up in Libya. It needs Libya's help in stemming the numbers of immigrants leaving Libya for Europe. But even on this subject the Libyan leader has left red faces. He suggested the European Union pay 5bn euros for his continued help in blocking illegal immigration, in order to, in his words, "avoid a black Europe". The European Commission was decidedly frosty at the suggestion.

The Libyan leader has led Libya for more than 40 years. He's in his late sixties; his radical past conveniently forgotten if not forgiven. But some in Italy now want Berlusconi to shake free from the Libyan embrace.

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