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Berlin Rift on Debt Crisis: Merkel Muzzling Coalition Critics to Gain Time

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German Chancellor Angela Merkel has tried to bring her coalition partners back in line following rogue comments on a possible Greek bankruptcy and exit from the euro zone. She is desperate to restore calm in her ranks to avoid exacerbating the crisis and to gain time to prepare for worst-case scenarios.

Angela Merkel: The German chancellor is trying to avoid pouring gasoline on the fire. Zoom
AFP

Angela Merkel: The German chancellor is trying to avoid pouring gasoline on the fire.

These days, when Angela Merkel and Nicolas Sarkozy issue a joint statement, it usually means that the debt crisis has fallen into a state of greatest possible uncertainty. It's when the German chancellor and the French president feel compelled to call for quiet and discipline. The message to be expected at these times is that the euro is safe, the Greeks have understood what must be done and that everything is under control -- even if nothing really is.

Tuesday, midday, appeared to be one such time. A news agency had reported that a joint German-French statement on the euro bailout was expected imminently. The news was followed a half-hour later by denials -- first from Paris and later from Berlin. "There will be no paper on Greece today," Merkel stated personally during a press conference held after a meeting with Finnish Prime Minister Jyrki Katainen in the chancellor's offices, the Chancellery.

There was little Merkel could do about the false report. The rumor appeared to have originated somewhere close to the French government. Nevertheless, the latest confusion was symptomatic. The chancellor's crisis management isn't going well, and the policies being pursued in efforts to rescue the euro are appearing more and more like some kind of odyssey.

Merkel, who heads the conservative Christian Democratic Union party, is in a dilemma. Germany, as the continent's economic engine, has a duty to hold the European Union and the euro zone together at this difficult time. But Merkel must also pay attention to growing skepticism amongst the German public, and she must explain and justify her actions to critics within her own political ranks. That obviously works best when, at the very least, Merkel's cabinet -- comprised of the her CDU, it's Bavarian sister party the Christian Social Union (CSU) and the business-friendly Free Democratic Party (FDP) -- demonstrates unity and speaks with one voice. Precisely the opposite is happening right now, with a growing number of soloists in the unruly choir of her coalition.

A Rebuke for Merkel's Economics Minister

This week, Merkel had to call her vice chancellor and economy minister, Philipp Rösler of the FDP, back into line after he said there should be no "taboos" on Greece and mentioned the possibility of an orderly bankruptcy for the country in a newspaper guest editorial on Monday. Rösler must have felt like a schoolboy being scolded by his teacher. Merkel was said to have been furious about his statements. And it is doubtful she found much pleasure in the fact that he then defiantly stuck with his words after the rebuke. "More and more people are asking themselves how Europe will proceed," Rösler told the Rheinische Post newspaper. "Honest answers are rightly being demanded about how to deal with countries that don't adhere to their reform commitments."

Merkel's other coalition partner, Bavaria's CSU, not only welcomed Rösler's words -- it also issued its own position paper in which it did not rule out the idea that highly-indebted states should leave the euro zone. It was yet another move that did not exactly add to unity within Merkel's coalition.

The chancellor is trapped between two coalition partners who are each pursuing their own domestic political agenda. On the one side, she has an FDP that risks sliding into irrelevance following a dramatic slump in voter support, and is desperate to sharpen its profile. On the other, she has a CSU that is seeking to regain its absolute majority in the Bavarian state parliament in 2013. On Tuesday, she sought to reach out to these partners using a diplomatically formulated appeal during her joint appearance with the Finnish prime minister. She said she was convinced that the parties in her cabinet were united on the path to save the euro.

Merkel Navigates According to Visual Flight Rules

Merkel is keen to avoid talking openly about a Greek insolvency because she regards the consequences of such a move as incalculable. After all, what would happen if Greece actually did officially declare it was insolvent or the country even left the currency union? Experts are divided on this. Would the situation calm down because, finally, there was no more horrific news coming out of Athens? Or would it worsen because a large number of banks would be exposed? Would the Greek economy be permanently ruined? And would a domino effect hit Spain, Ireland, Portugal and Italy?

These are all risks Merkel doesn't want to take -- at least not yet. She is trying to keep up the pressure on Greece, partly in order to assuage MPs in her party who doubt the country can be rescued. At the same time, she is urging patience and caution. "It will be a very long, step-by-step process," Merkel reiterated on Tuesday. The chancellor appears to be flying blind. She doesn't know what risks are going to pop next: Will it be Rösler, Seehofer -- or a fresh crop of bad news from Athens? She knows very well that Greece is in dire straits. She also knows that an insolvency cannot be ruled out. At the same time, she doesn't want to fan the flames. She would prefer to have the experts in her government quietly play out the worst-case scenarios internally.

The first thing that must happen in preparation for this worst-case scenario is the establishment of the expanded European Financial Stability Facility (EFSF). This is because it is the EFSF, with an expanded toolbox of financial instruments at its disposal, which will be the first institution that could absorb a Greek bankruptcy -- that's one area experts in the German Finance Ministry are certain about. The vote in the German parliament on expanding the EFSF's powers is set for the end of September.

Merkel and European Commission President Jose Manuel Barroso just reiterated that the rescue fund should be up and running by October. That's the month when Greece's finances could ultimately dry up. If the troika comprised of the International Monetary Fund, the European Central Bank and the European Commission conclude that Athens hasn't fulfilled the reform conditions stipulated, then the next tranche of previously agreed to aid for Greece will not be paid out.

On Wednesday, French President Sarkozy and Chancellor Merkel will take Greek Prime Minister George Papendreou to task yet again in a conference call. It is quite possible there may be another joint German-French statement afterwards. The message: Everything is under control.

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