When German Chancellor Angela Merkel stood before reporters at the EU summit held in mid-December in Brussels, she took advantage of the opportunity to make a minor concession to neighboring France. "We have obviously been discussing the issue of an economic government for a long time," Merkel said. "What we are currently envisioning goes yet another step in this direction."
In an effort to gain some control over the euro crisis, the Europeans had agreed to replace the existing rescue fund for over-indebted euro-zone countries with a permanent mechanism. But there was also another matter that attracted less attention: At least as far as the French saw things, they were also supposed to be developing ideas for how to strengthen political cooperation between euro-zone member states on economic issues.
A few weeks on, little remains of the summit's spirit of harmony. At the moment, there is serious wrangling between Berlin and Paris over the details of the planned crisis mechanism. Indeed, the two governments have completely different conceptions of exactly what a European economic government would entail.
For Merkel, it's about much more than mere terminology. In the runup to important state elections in Germany, particularly one in the southwestern state of Baden-Württemberg at the end of March, Merkel wants to demonstrate that German taxpayer money isn't being wasted to pay for the excesses of heavily indebted countries in southern Europe.
The Germans and the French are interpreting the summit's resolution in completely different ways. France would prefer to see the European Council, which comprises the heads of state and government of the EU's member states, turned into a kind of economic government. Since only euro-zone member countries would be involved initially, French Finance Minister Christine Lagarde has dubbed the project "16 plus."
The Germans are focused on completely different things. Their preference would be to see the current rescue fund replaced by the so-called European Stability Mechanism in 2013. According to this arrangement, in return for any help, cash-strapped countries would have to subject themselves to a strict cost-cutting regimen.
From the German perspective, ideas about such a mechanism are already at an advanced stage:
- The existing European Financial Stability Facility (EFSF) would serve as a rough model for the new mechanism. Countries that ask for help must observe strict requirements, which could go as far as the obligation to introduce a so-called "debt brake" along the German model. (The debt brake is an amendment to Germany's constitution that requires the government to virtually eliminate the country's structural deficit by 2016.) For the first time, private-sector creditors would have to share restructuring costs. The International Monetary Fund (IMF), which is currently involved with the EFSF, would also remain on board after that fund expires in 2013.
- Unlike the fund currently in place, its successor would also be able to buy up the sovereign bonds of over-indebted member countries. The desired side effect is that the European Central Bank (ECB), which is currently helping cash-strapped countries by purchasing their bonds, can get back to concentrating on setting monetary policies and monitoring banks.
- As is the case with the EFSF, creditor states would reach an agreement on the future stability mechanism among themselves. The fund's decisions would have to be unanimous, and Germany would be able to veto any particular loans from being granted.
'We Don't Need any New Institutions'
It's still too early to talk about the possibility of reaching an agreement with the French. On the contrary, right before Christmas, a position paper including similar suggestions was leaked from Germany's Finance Ministry that even called for the establishment of an independent funding instrument that would be entrusted with the power of determining EU economic policies in times of crisis. The French responded with irritation. The word from the French Finance Ministry in Paris was that: "We don't need any new institutions."
In response to the leaked German paper, Lagarde presented her own plans for what a future European economic government could look like. According to her plans, EU states would have to harmonize not only their national budgets, but also their economic policies. For example, Lagarde proposes that if a country wants to improve its balance of trade by exporting more, it must first "gain the consent of the others" within the group of EU governments.
Still, that sounded so much like a state-controlled economy that German Economics Minister Rainer Brüderle, a member of the business-friendly Free Democratic Party (FDP), immediately announced his opposition to the French proposal. Brüderle suggested that Lagarde was tackling "the wrong problem," while also making it clear that he had doubts about the plans for the fund described in the leaked Finance Ministry paper. As a memo from his ministry put it, such an institution would have to be 100 percent politically independent or it would run the risk of becoming "the nucleus of a politically driven transfer union over time."
Politicians in Germany's ruling coalition -- made up of Merkel's center-right Christian Democratic Union (CDU), its Bavarian sister party, the Christian Social Union (CSU), and the FDP -- fear being presented with a fait accompli. According to senior CSU politician Hans-Peter Friedrich, a new, independent fund would be "unnecessary."
Instead, Friedrich suggests that the upper ceiling on the current €750 billion ($1 trillion) bailout fund could be dispensed with in an emergency -- despite the fact that his party had vociferously opposed such a plan just a few weeks earlier. "I view all the talk about a ceiling as superfluous," Friedrich says, "because, with or without a ceiling, we will still have to do what is needed."