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High Stakes ahead of Crunch Summit: Euro Crisis Threatens European Way of Life

By Konstantin von Hammerstein, and

Part 2: A Battle for Dominance in Europe

Photo Gallery: Muddling Through Photos
REUTERS

The conflict between the two leaders extends well beyond questions of policy. Hollande waged an election campaign against German dominance in Europe. As a result, he became the voice of, in particular, the Southern European countries, which are sharply opposed to German austerity policies. It's a role Hollande seems to enjoy.

"Our impression that Hollande would find his way back to being more willing to compromise after the elections was wrong," says a senior government official in Berlin. "Now he apparently wants to demonstrate that France is the leading power in Europe."

Merkel resents the Frenchman for gathering allies against her in the EU and even in Germany, and for taking the partisan fight into Europe's governing bodies. It seems as if the Germans and the French are about to embark on a battle for dominance in Europe -- and in the middle of a serious crisis, of all times.

The participants in the G-20 summit urged their European counterparts to set aside their differences. World Bank President Robert Zoellick urged the Europeans to make up their minds, and not to "push it to the brink."

The assembled world leaders called upon Merkel, Hollande and the others to finally present a solution at the EU summit in Brussels at the end of the week. They have "high expectations" for the expected outcome of the summit, said South Korean President Lee Myung-bak.

Far-Reaching Proposals

The proposals that the heads of four EU institutions -- European Council President Herman Van Rompuy, Euro Group President Jean-Claude Juncker, European Commission President José Manuel Barroso and European Central Bank President Mario Draghi -- have sent to the 27 governments are far-reaching. They propose a comprehensive reorganization of European economic policy in four areas:

  • Banking union: In a first step, national deposit insurance funds could be combined to form a European fund. This fund would later be augmented with a Europe-wide bank charge. In the future, the money could also be used to help banks in trouble. If the four leaders have their way, a new watchdog agency would not just regulate the major banks, but all financial institutions. The new agency would be located at the ECB.
  • Euro bailout fund: The European Stability Mechanism (ESM) is to be given the power to finance ailing banks directly. This would eliminate the need for an individual country to apply for bailout funds and fulfill additional requirements.
  • Jointly issued debt: To reduce government debt, the authors recommend a debt redemption fund to pay off pre-existing debt, as proposed by the German Council of Economic Experts. In the long term, however, the four EU officials want a different model, in which no country in the euro zone would be allowed to take on new debt without the consent of the other countries. They also propose a European debt agency.
  • Fiscal union: The proposal calls for the introduction of a financial transaction tax and the uniform assessment of corporate tax.

Even through Van Rompuy and his co-authors carefully avoid potential divisive terms like "sovereignty transfer" and "euro bonds," the plans stand little chance of succeeding. The Germans are strictly opposed to assuming liability for weaker countries unless it is tied to collective political control.

For this reason, Berlin will do everything it can to weaken the report by the EU summit at the end of the week. Because there is already little hope that concrete decisions will be reached, the Brussels meeting can already be regarded as a failure. The expectations are so great that they will certainly not be met.

The Europeans have decades of experience in maneuvering through crises with mountains of paper and by constantly forming task forces. The quartet of presidents is also prepared for this approach. The four men assume that European leaders will initially extend their mandate. Another interim report is planned for the fall, and by December a reform of the monetary union is expected to exist on paper -- perhaps.

Whether the euro will still exist in its current form by then is questionable. Greece, at any rate, might already have left the common currency.

Relief Evaporates

The relief over the election victory of the pro-reform party New Democracy in Greece gave way to disappointment within just a few days. The new Greek prime minister, Antonis Samaras, had hardly been sworn in before he reneged on his promise to adhere to the commitments made to the EU and the International Monetary Fund. The bailout program would have to be extended for two more years, he told his euro-zone counterparts. But that would probably cost at least €50 billion ($62.4 billion).

Most of the 16 euro finance ministers who met in Luxembourg last Thursday had no sympathy for Athens, saying that apparently the Greeks still hadn't grasped the gravity of the situation.

Ironically, the new Greek finance minister, Vasilios Rapanos, did not attend the meeting, although he did have an excuse. Rapanos -- who has since resigned -- had his staff inform the other ministers that he needed more time to familiarize himself with the complicated subject matter.

Translated from the German by Christopher Sultan

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1. Plus ça change!
Eleos 06/26/2012
The rosy experience that younger members of the EU enjoy, travelling without hinder among the nations of Europe, is founded on a lie. It has not been harmony evolving from the bottom up that has forced the leaders to see things collectively; but rather the unspoken purpose to prevent Germany achieving the position her people have earned, that has forced concessions on Germany at every major point, whether the budget rebate demanded by Mrs Thatcher or the introduction of the Euro in return for German reunification. Just like the national alliances before WWI, the Versailles Treaty afterwards, and the diluted Morgenthau Plan imposed after WWII, the goal is the same. Britain plays her habitual role of divide-and-rule while posing as an honest broker. Another fudge will please the markets for a few nanoseconds less than the last time. A profound change is required, or rather two profound changes: a reorganization of the Eurozone, and a large dose of friction for the markets in the form of a financial transaction tax. Better than the piecemeal departure individually of the smaller countries who do not want to keep the promises they gave only recently, would be the withdrawal of Germany together with a few of the other fiscally prudent nations who are fed up with the underhand practices of those who want the benefits without the effort, and who resort to blackmail to get their way.
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