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Merkel and the Crisis: The Demolition Lady Strikes Again

A Commentary by

With Thursday's decisions in Brussels, Europe has made good progress towards saving the euro. This is in large part due to the work of the German chancellor. Angela Merkel's approach -- to decelerate rather than succumb to panic -- is starting to pay off.

Chancellor Angela Merkel seemed satisfied after the EU summit. Zoom
DPA

Chancellor Angela Merkel seemed satisfied after the EU summit.

If it's true that maintaining power is a politician's ultimate goal, then Angela Merkel came a good step closer to fulfiling that aim last night. The deal in Brussels was first and foremost a success for the German chancellor. She managed to get her way on a number of key issues and, with a little luck, Europe may now be on the right path towards overcoming the debt crisis.

Things could still go wrong, of course. The bailout process is far from complete. But for the first time now there is some clarity amid Greece's debt chaos. Merkel would appear to have learned in recent months. She has transformed herself from a leader merely reacting to events into one who now designs steps to control those events. She has also built up trust, which could ultimately pay out in the form of votes.

A Controlled Demolition

Merkel took great care in preparaing the demolition of a ramshackle house. But she resisted the temptation to push the detonator immediately. Now, the explosion will be a controlled one. Those in its immediate path have been provided with a minimum of safety equipment and a firewall has been erected to contain the rubble.

The Brussels summit is an interim step and it will be followed by many further summits. A number of questions remain unresolved. Will Europe soon become dependent on China should Beijing invest in Italian bonds? Will the banks really survive the 50 percnet debt haircut agreed to on Thursday morning? Will Greece, Italy and other countries perpetually guilty of violating deficit rules submit to Germany's austerity dictate? And how can deeper European integration be forged? Yet at least now there has been some progress in a few key areas.

Greek debt reduction was necessary in order to get the country back on its feet. It is equally important that it not be the taxpayers alone who are forced to carry the burden of policies of unfettered borrowing in countries that created the current mess. The banks -- e.g. those who profited from these policies -- are also being forced to pick up a considerable part of the tab. It is also correct that the debt haircut will first be applied when it has been assured that the action will not lead to financial collapse in other highly indebted countries. Were that to happen, at least the euro backstop fund, the European Financial Stability Facility (EFSF), now has the firepower to address the problem.

Merkel's Advantages

Merkel's apparent weaknesses have served to her advantage in the crisis. In contrast to others, she doesn't plow ahead like a bull in a china closet -- she goes about her work in a cautious and considered manner. And whereas the public and the markets can sometimes succumb to panic, Merkel has a tendency to decelerate.

Indeed, it isn't Merkel who should adjust to the pressures of the market -- it is the other way around. The markets ought to take a cue from the primacy she gives to objectivity. The best example yet of this was her decision to split Sunday's summit into two parts. It did no damage and the markets reacted calmly.

It is a process which produces solutions which may not be ideal and they may come late -- but they at least appear to be reasonably thought out and could contribute to calming the markets.

Merkel has presented herself as a good European. At the same time, she has neutralized two antagonists. She is now leading the competition with Nicolas Sarkozy for leadership of Europe. Contrary to what the French initially proposed, the EFSF backstop fund will not be given license to run up as much debt as it sees fit. Instead the German model of leveraging the fund to provide insurance on bonds has won out.

Meanwhile, back in Germany, Merkel has reduced the role of the opposition parties in the euro rescue debate to that of extras. Be it the Social Democrats or the Greens, they will merely rubber stamp whatever she hands to them.

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1. Demolition what?
alfredmifsud 10/30/2011
You mean the demoliton step by step of the entire Euro system by obstinately blocking the supposedly autonomous ECB from apply a monetary solution to the crisis? By her own words the inevitable collapse of the Euro in its present form will inevitably lead to the disintegration of the EU and the reversal of sixty years of peace and propserity in post-war Europe. The German Chancellor is rendering the Euro problems as a totally political issue seeking a 100% poltical solution in fora that Germany and herself dominate so much so that she now has the French Presdient eating from her hands and wanting France to become like Germany. Many are forgetting that one of the main sources of the current problems of Spain and Italy is that the ECB kept interest rates too mlow to accommodate the integratation of East Germany with the West. Now that Germany benefitted from bending the EU rules to arrive at the point of economic domination they are prescribing austerity for everybody till the point where their economy will crash. Time for European states to make it clear that they oppose the Germanisation of Europe.
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