An Economic Government for the Euro Zone? Merkel's Plan Could Transform the European Union

German Chancellor Angela Merkel wants to stabilize the euro through a "pact for competitiveness" that would force EU members to coordinate their national policies on issues like tax, wages and retirement ages. The plan would transform the EU if it becomes reality, but resistance will be fierce -- including from within Merkel's own governing coalition. By SPIEGEL Staff


It was intended to be a pleasant evening. At their meeting in the German government's guesthouse in Meseberg near Berlin last Tuesday, German Chancellor Angela Merkel and European Commission President José Manuel Barroso had set aside plenty of time to resolve their dispute on how to save the euro. The comfortable fireplace room had been prepared, with sparkling wine and beer ready to be served. Only their closest advisers were allowed to attend.

Barroso began with a correction. The Portuguese politician said reports that he disagreed with the chancellor on the euro rescue fund had been incorrect. He said that he had been misunderstood. Although Merkel had a different impression, she let the matter rest.

She was interested in a productive atmosphere for talks because she wanted to win over Barroso for a far greater plan. It is a plan that has evolved slowly -- Merkel had to warm up to the idea herself -- and she knows that it won't appeal to the head of the Commission. Dubbed the "pact for competitiveness," the plan that Merkel has in mind could permanently change the structure of the European Union.

The idea, which the chancellor conveyed to her guest in English, calls for closer cooperation among the member states of the euro zone. It would entail more closely harmonizing their financial, economic and social policies. Merkel hopes that this would prevent the economies of the euro countries from diverging as much as they have over the past few years. If fully adopted, it would take European cooperation to a whole new level.

A New Merkel

Above all, it would mark the emergence of a new German chancellor. Up until now, Merkel has shown herself to be exceedingly hesitant in dealing with the euro crisis. After all, she has never been a fully committed supporter of the European project. During her early life in communist East Germany, before the fall of the Berlin Wall, Merkel was mainly interested in West Germany and the US, which she regarded with a sense of longing. Yet she didn't lend nearly as much attention to the region that lay between these two countries.

As chancellor, Merkel saw it as her duty to protect Germany's coffers. When the financial crisis erupted in September 2008, she said, during a flight to St. Petersburg, that the Germans would not bail out ailing Irish banks. That set the tone for her approach to crisis management at the time, and also during the current euro crisis. She has had reservations about aid for Greece and hesitations with regard to the European euro rescue fund. When it comes to safeguarding the European common currency, Merkel has always seemed like a politician who reacts, not one who acts.

But now she intends to fundamentally change things. With her plan, the chancellor wants to do more than just go on the offensive politically. She has also set out to rectify the weakness that the former long-serving Commission President Jacques Delors considers a basic "design flaw" in the monetary union: Although there is a common currency in Europe, there is no corresponding common economic policy.

The Merkel pact aims to remedy this shortcoming, at least in part. According to the plan, the euro-zone countries would coordinate their economic policies far more closely in the future, thus playing a leadership role within the entire EU. What Merkel has in mind is essentially nothing other than the "two-speed Europe" that her finance minister, Wolfgang Schäuble, similarly proposed many years ago.

Political U-Turn

Merkel has made a political U-turn that is virtually as dramatic as the change in course made by her predecessor in office, Gerhard Schröder, when he introduced his radical -- and hugely unpopular -- "Agenda 2010" reforms of the labor market and welfare system. Just as Schröder, a member of the center-left Social Democratic Party (SPD), abandoned what he saw as the outmoded social policy positions of the SPD, Merkel has discarded a number of her fundamental convictions about Europe.

Until recently, the chancellor had strictly opposed any closer cooperation among the 17 countries in the euro zone. She wanted to include all 27 EU member states. Her concern was that this would otherwise lead to a union within the Union. Her fear was that countries that are not members of the euro club, such as Poland, could be sidelined.

As recently as May 2009, Merkel said in a speech given at the Humboldt University in Berlin that she would oppose any "divisions in Europe." She went on to say that she was also against "often ill-conceived demands for more intensive coordination of economic policies" in the euro zone.

Now it's a different story altogether. Now Merkel wants to make the center of the current crisis, the euro zone, into the focus of efforts to combat the common currency's woes. That notwithstanding, the pact is intended to be open to all EU countries, not just the members of the euro zone. That's something which is important for Merkel.

Her plan is ready, but there is still discussion about how to make it reality. Barroso told Merkel during last week's meeting in Meseberg that the European Commission wants to direct the process. Merkel, on the other hand, claims this role for herself and the other heads of state and government. There was reportedly a heated discussion concerning this point. "I will not allow the European Commission to be sidelined," Barroso told his aides afterwards. At least Merkel assured him in Meseberg that the Commission would oversee progress toward the plan's goals in the individual countries. She also said that he could attend meetings when the leaders of the euro-zone countries convene in the future.

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muley63 01/31/2011
1. Constitutional Convention
This is exciting. While it's not a birth of a new nation, it something half-way to it. Not a super power, but not a middle-weight, either. I didn't think PM Merkel had it in her. Can she dump the FDP and go back to the SDP? The FDP is a drag on modernity.
citizenwhy 01/31/2011
2. Irish bailout not a bailout for Ireland
The so-called bailout of Ireland is a bailout for German, French and UK banks. The Irish Prime Minister agreed to bail out his banking cronies by having the government pay the debts and the bonds (very unusual) of certain privately owned Irish banks. The debts and bonds are owed mainly to German, UK and French banks. Ireland is bailing out European banks, not the other way around. Because of the huge cost of paying these debts and bonds, the Irish government took a loan at 6% interest from the IMF/ECB. This so-called bailout will cost the Ireland 30% of its GDP for many years, plus 10% of its tax revenues for many years (providing the pool of taxpayers does not shrink due to emigration and unemployment). This is a prescription for a depression resembling post-WWI Germany.
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