The End of Old Europe: Why Merkel's Triumph Will Come at a High Price

Part 2: A Costly Compromise for Germany

French President Nicolas Sarkozy speaks with German Chancellor Angela Merkel during the EU summit in Brussels. Zoom
AP

French President Nicolas Sarkozy speaks with German Chancellor Angela Merkel during the EU summit in Brussels.

Despite German resistance, Van Rompuy, Barroso and Euro Group President Jean-Claude Juncker do not want to give up their plans for common euro bonds. At the summit, the heads of state and government agreed that the trio would submit concrete proposals on the introduction of such bonds by March 2012. One of the purposes of the euro-bond effort is to break the German-French entente, an EU diplomat explained.

In order to make an agreement possible at the summit, Germany had to make additional concessions. One thing that will not materialize is the right to file suit against deficit offenders before the European Court of Justice, something that Merkel had been demanding for weeks.

The Brussels compromise will also become more costly for the Germans than previously planned. If the launch date of the permanent bailout fund, the European Stability Mechanism, is moved up to mid-2012, as was agreed at the summit, Germany will have to pay its cash contribution a year earlier. This translates into an additional burden on next year's budget of at least €4.3 billion. Additionally, Berlin had to pledge that it agreed with the cap on the ESM, currently set at €500 billion, being "reassessed" in March 2012.

The euro-zone countries also want to give the International Monetary Fund (IMF) up to €200 billion in loans for aid to euro countries. The money is to come from the central banks of the EU countries. Germany's central bank, the Bundesbank, opposes the plan, which it sees as a trick to circumvent the regulation that prohibits the ECB from financing governments.

'Very Ambitious' Timetable

But how quickly can all the results be implemented? And how determined are those European leaders who have reluctantly given in to Merkel and Sarkozy to follow their words with actions? And how much resistance will the plans to transfer a portion of sovereignty to Brussels encounter in their respective countries?

Norbert Lammert, the president of the German parliament, the Bundestag, and a member of Merkel's CDU, believes that the timetable for the planned reforms is "very ambitious," but he is also convinced that they will not fail in the Bundestag. He does have concerns, however, over whether the planned changes can be brought in line with rulings made by Germany's Federal Constitutional Court.

"The Bundestag will carefully review possible constitutional problems that could result from direct intervention by the European Commission or a European currency commissioner in national budgets and thus the parliament's budgetary powers," says Lammert. "The Bundestag will take great care to ensure that such constitutional risks are avoided."

First, however, investors will have to be convinced that the approved measures are in fact sufficient to save the euro. The head of the European Financial Stability Facility (EFSF), German economist Klaus Regling, encountered skepticism when he spoke with investors on the phone on the evening of the summit. They told him that they intended to reduce their exposure in the euro zone.

Calls for the Big Bazooka

Italy and Spain, which have both been hit by the crisis, will have to once again borrow large amounts of capital already in January. If buyers continue to shun their bonds, there will immediately be renewed calls to deploy the instruments Merkel has consistently rejected, namely euro bonds and a massive intervention by the ECB.

The German chancellor knows all too well that her coalition partner, the liberal Free Democratic Party (FDP), will not go along with jointly issued bonds. If she supported euro bonds, her coalition would be finished. That is a step she is not prepared to take, she recently told close associates.

The chancellor is much more flexible when it comes to the ECB. Merkel and Finance Minister Wolfgang Schäuble are tacitly relying on the central bankers for their help in saving the euro. Merkel and Schäuble are calculating that they will rush to the euro's aid with their unlimited funds if the continued existence of the monetary union is in danger. That would not require a banking license for the EFSF or its permanent successor, the ESM.

Because of its independent position -- so the thinking goes -- the ECB could provide any financial institution with cash in return for collateral. Besides, it still makes its own decisions on the quality of collateral. Consequently, it would be easy for the ECB to provide capital for the bailout funds, even without them having a banking license. If necessary, the central bank could also become directly involved in the bond markets and buy up securities on a massive scale to rescue the euro.

Saving Their Own Jobs

In the opinion of government officials, this approach would be in the ECB's own interest. The argument is that the monetary watchdogs in Frankfurt would never go so far as to put their principles and concerns over their own future. If the euro were to fail because they refused to provide assistance, they would be making themselves redundant. Hence, officials at Berlin's ministries are assuming, the heads of the ECB will do everything to ensure the continued existence of the euro -- and, with it, their jobs.

In their baseline scenario, German Finance Ministry officials assume that the monetary union will continue to consist of 17 members. A different scenario, which they believe is less likely to occur, assumes that Greece leaves the euro zone, while all other countries stay.

If necessary, say Finance Ministry officials, the two bailout funds will still have hundreds of billions of euros available, enough money so that even Italy could be kept afloat for a few months. And if it isn't enough, the ECB will simply have to step in.

REPORTED BY ARMIN MAHLER, PETER MÜLLER, RALF NEUKIRCH, CHRISTIAN REIERMANN AND CHRISTOPH SCHULT

Translated from the German by Christopher Sultan

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1. A different view
zummerzetboy 12/12/2011
As a newcomer to Spiegel's Forums I may not be doing quite the right thing as I've already tried to make this post but have apparently been unsuccessful. Nevertheless I'll have another go. My first attempt was to click a link that turned out to be a way of sending a letter to the Editor. Here is what I said: Sir, The draft ESM Treaty and the amendments to it proposed as a result of last week's Summit pose more questions than there are answers. As has been said, Fiscal Union proposals, whilst certainly worth debate may be likened to advice given to some-one suffering from a heart attack right now to take more exercise and reduce cholesterol to avoid one in the future. There is now a very high probability the markets will force a default somewhere in the Eurozone system - a country, or a bank - that will bring the entire edifice crashing to the ground before any of these constitutional changes in the Eurozone can be brought into force. That is now doubly so since both the ECB and the Bundesbank have declared the idea of laundering money through the IMF, in the hope it will attract additional funds from Asia and other regions, is not possible because of Germany's constitution and existing Treaty obligations - unless of course Germany defaults on her obligations and changes her constitution. Would either course increase confidence in the markets? Here are some of the unanswered questions and comments on them: How will Merkel get this past the German Constitutional Court and her own population's reluctance to pay for others? How will Sarkozy deal with the French farmers and his rivals in next year's Presidential elections? Beware the rise of Le Pen and extreme French nationalism - even more so than at present. How will Kenny get the Irish to accept their loss of a favourable corporate tax regime? etc etc Where are the checks and balances on the EU Commission's, the ECB's and the ESM's executive powers? All democratic states consider these to be essential to avoid the emergence of a malign Dictatorship. Remember Acton's dictum - "All power corrupts, absolute power corrupts absolutely". Why will the introduction of an Intergovernmental Treaty in the distant future solve a problem that will be manifest much earlier as inter-bank lending freezes and attempts to roll-over national Government debts fail? - the proposed "bail-out" funds that have not yet been committed are insufficient to meet the demand that is due next year. That is why the proposed Treaty terms give the ESM the power to draw upon Member States Exchequers for any amount to be delivered at seven days notice - unless 85% of the Members voting rights are cast to prevent that happening - ie France and Germany can enforce it on other nations but other nations can't enforce it on France or Germany. Is there any wonder that resentment against France and Germany is building throughout Europe? Thank goodness the UK is "Isolated" from these monstrous proposals. These issues were all apparent to Cameron who adopted the line he did, rather than principled opposition to the whole proposal, in the hope this reasonable approach would persuade Merkozy to show enough flexibility to keep the show on the road long enough for more pertinent actions to be agreed. Let us hope the 26 find a different way to solve the immediate problem - shared liability by all for the debts of any - and revise their long term ideas for Fiscal Union to a point where the UK can accept their proposals. The omens are not good so the highest probability must be that the markets force a collapse of the Euro before any of the probably inadequate "rescue mechanisms" come into force. Incidentally, that is why Barrumpy et al are trying to force the pace by bringing forward by one year the introduction of the ESM through a Protocol that is not yet legally in force - and could still be blocked if the UK Parliament refused to ratify the Amendment to the Treaty of Lisbon that authorised it. That would result in the proposed ESM Treaty being downgraded to a legally unenforceable Declaration of Intent, or require the 26 to set up institutions parallel to but separate from those of the European Union. That is in no-one's interest so please think again Germany. A Europhile resident of the UK PS Please notify me by e-mail if you publish this message.
2. Euro crisis
aanna 12/12/2011
Bravo Great Britain!!!. It is the only country which knows how to care for its own interests and has had the courage to defy Germany's striving for the power over Europe.The whole European debt crisis has been blown out of all proportions only to enable Germany to maintain its leading position and rule over the whole Europe. Only stupid leaders from some other countries seem to be unable to see all this in a proper light, or maybe they do and they only pretend to be stupid. I am fairly sure that none of the European countries will collapse in case of the downfall of the common currency. Europe will successfully go on as the union of independent countries with their own single currency having strong mutual economic ties,and that's all what it is to it. And to make it clear, I' m not British.
3. Euro Crisis
aanna 12/12/2011
Bravo Great Britain!!!. It is the only country which knows how to care for its own interests and has had the courage to defy Germany's striving for the power over Europe. The whole European debt crisis has been blown out of all proportions only to enable Germany to maintain its leading position and rule over the whole Europe. Only stupid leaders from some other countries seem to be unable to see all this in a proper light, or maybe they do and they only pretend to be stupid. I am fairly sure that none of the European countries will collapse in case of the downfall of the common currency. Europe will successfully go on as the union of independent countries with their own single currency having strong mutual economic ties, and that's all what it is to it. And to make it clear, I' m not British.
4. Euro stability
harryenglish 12/12/2011
If Merkel & Sarkozy think that by stitching up the UK on FTT, they are some how securing the Euro, they are mistaken. The Euro Issue is not related to the City of London, but to structural flaws brought about by arrogance and incompetance.
5. Questions left unaswered
alfredmifsud 12/13/2011
It is clear that Germany do not want to solve the crisis which is giving them a great economic benefit in lowering their borrowing costs and keeping them super competitive on exports with a weakening Euro exchange rate. The Germans just want to do enough to keep the Euro system together without actually reforming it as it needs to be reformed. Keeping distress countries at the edge, pull them in just enough to prevent them tipping over, but never pull them back enough to feel secure and start challenging German diktats in Europe. The French are just being used to give a milder tone to German domination and to avoid memories of German European conquers of the 20th century. It is clear that there is no longevity for a monetary union with desparate economies. If the Germans really want to save the Euro they should seriously consider leaving it and reverting back to their Deutsche Mark to allow the Euro to fall to a level where countries in distress regain competitiveness. Forcing fiscal union and similar sausage machine arrangements before addressing the present inbuilt pressures and disparaties serves only to expose the political hegemony that is the true objective of German leaders. Germany has to pay for abusing other countries inside the Euro system. The UK will not be the only or last country to opt out of the new agreement. When it comes to details other countries, including some Euro members will also get cold feet. Germany has to pay either by leaving the Euro or by accepting that fiscal union is only possible if they accept joint and several liability for all Euro countries debts through launch of Eurobonds.
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