Photo Gallery: Muddling Through


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

European leaders have been muddling through instead of properly tackling the debt crisis. Now it threatens the very foundations of the European Union and could destroy a lifestyle that millions of Europeans take for granted. But the high expectations for this week's summit in Brussels can only be disappointed.

It's unclear what Meles Zenawi used to think about Europe. The prime minister of Ethiopia heads an authoritarian regime that controls one of the poorest countries on Earth, located in East Africa, a region where ethnic conflicts are usually waged with Kalashnikovs. To a man like Zenawi, rich, peaceful Europe must seem like an island of the blessed -- or rather, must have seemed.

Zenawi's view of the old continent probably changed on Monday of last week. The Ethiopian leader, attending a dinner hosted by the exclusive G-20 club of the most important industrialized and developing countries in Los Cabos, Mexico, was astonished by what he heard.

The doors of the dining room had hardly been closed before the European representatives began giving their counterparts from other continents an eye-opening demonstration of how powerless and divided they are. The humiliation began with a simple question from the host, Mexican President Felipe Calderon. He wanted to know what the Europeans intended to do to get the high interest rates that the Spanish government currently has to pay on its bonds under control.

It was an important issue, replied Italian Prime Minister Mario Monti, whose country is also having great difficulty funding its debt at sustainable interest rates in the market. He proposed that the euro bailout fund buy bonds on the secondary market.

Out of the question, German Chancellor Angela Merkel sharply replied. But why not, her Spanish counterpart wanted to know? Then, Spanish Prime Minister Mariano Rajoy complained about how unfair it was that the crisis is affecting his country, especially given that the Spaniards are "hard-working people" who get up "at 7 a.m. every morning."

In the end, it was British Prime Minister David Cameron who said what many people in the room were thinking. He pointed out that the euro is not irreversible, and that a failure of the common currency  is quite conceivable. French President François Hollande tried to downplay Cameron's remarks, but no one was convinced anymore.

Quarreling in Front of World Leaders

In about half an hour, Zenawi and some of his counterparts probably learned more about Europe than they wanted to know. The European Union is in the middle of the worst crisis of its history, the common currency is threatening to break apart, and the leaders of the most important European nations were quarreling in full view of their counterparts from five continents.

Everyone knows what is at stake. "If the euro fails, Europe will fail," German Chancellor Angela Merkel said in a May 2010 speech in the western German city of Aachen. Since then, the Europeans have held summit after summit and pledged bigger and bigger sums of money in a bid to get the situation under control. But it's only become worse.

Hardly anyone today would be willing to bet that Greece can remain a member of the euro zone for much longer. Spain, the fourth-largest economy in the euro zone, is on the verge of financial collapse, and it's only a matter of time before it too is forced to ask for a bailout, as Greece, Ireland, Portugal and now Cyprus have already done. On Monday, the Spanish government officially asked for EU help  for its struggling banks.

This means that almost a third of the euro zone's 17 members can no longer finance themselves by borrowing money on the markets. The situation is so dramatic that Italian Prime Minister Monti is already predicting that the fate of the euro will be decided within 10 days.

Eating Away at the Foundations

Like a dangerous fungus, the crisis within the common currency threatens to eat away at Europe's foundations. By now, there is nothing less at stake than an entire lifestyle, one that millions of Europeans have come to take for granted in the last few decades.

Nowadays, it's not unusual for young Germans, Poles or Portuguese to spend time studying at universities in other European countries. They have never seen barriers and customs inspections at borders within Europe. They only need to exchange money when they travel to places like Vietnam or Malawi.

People can easily live, study or work in other European countries if they wish. The continent, repeatedly devastated by wars over the centuries, has grown together in a way that great pro-European statesmen like Jean Monnet and former German Chancellor Konrad Adenauer couldn't even have imagined in the 1950s.

Is the European dream about to unwind? Even a cautious and levelheaded man like German Finance Minister Wolfgang Schäuble isn't entirely sure that the European Union will survive the possible collapse of the monetary union. Many things would be called into question, the finance minister said in a SPIEGEL interview,  "from the common domestic market to freedom of travel in Europe."

High Stakes

The EU countries, taken together, still constitute the world's largest economy. They can still compete with the US and rising Asian powers like China and India. And they still have access to valuable resources, to which they owe their prosperity.

But globalization is relentless, and demographics are not in the Europeans' favor. Europeans now make up 7.2 percent of the global population, but by the year 2060 that number will have declined to only 5.3 percent.

This is why the Europeans "collectivized" important tasks like trade policy long ago. It's the only way they could muster enough collective weight on the global political scale to keep up with other giants. Without the help of its European neighbors, even a large country like Germany would have trouble competing internationally.

This is now at risk as leaders debate Europe's future. The stakes are high. A collapse of the euro would threaten the world that Europeans have come to know and love in the last few decades. European leaders know this, but until now they have been incapable of agreeing on a counter-strategy.

The whole world is watching Europe. The crisis on the continent was the number one issue at the G-20 summit in Los Cabos. And sometimes an external viewpoint is colder and soberer than the internal one.

A Settling of Accounts

US President Barack Obama set the tone when he said that the world is no longer worried about Wall Street, but about Europe instead. "Every country at this table senses what is happening in Europe," Obama said. He praised German Chancellor Angela Merkel for her leadership in the crisis, but also insisted that it was time to "move boldly forward."

According to participants, what then followed was an unprecedented settling of accounts with Europe's approach to the crisis to date. Rarely have the assembled heads of state and government been as unanimous in their assessment. Indian Prime Minister Manmohan Singh warned that the crisis in the euro zone constituted the "biggest uncertainty" for the world economy. He said that he was concerned that the firewalls are "not sufficient to control the risk of contagion."

Canadian Prime Minister Stephen Harper said that the steps taken by the Europeans so far are not convincing the markets, and that what is missing is a "collective and overwhelming reaction" on Europe's part.

The South Americans also came to a devastating verdict. The European monetary union isn't working, said Argentine President Cristina Fernandez de Kirchner. And her Brazilian counterpart Dilma Rousseff summarized the group's displeasure, characterizing the Europeans' efforts as "too little, too late."

The Crippled Tandem

The main reason that the Europeans are muddling through the crisis so ineptly is that the continent remains divided on a central issue. Some countries, like Germany, the Netherlands and Finland, insist on fiscal discipline, while most of the other countries are calling for financial transfers from the wealthy north to the poorer south.

The German Chancellor is the head of the first group, while French President François Hollande is the leader of the second. As a result, the German-French tandem which used to set the tone in Europe, until former President Nicolas Sarkozy was voted out of office, has now been crippled.

At the G-20 summit in Los Cabos, Europe's leaders didn't even try to conceal this division. "We need fiscal discipline because we have a debt problem," Merkel demanded. Her adversary Hollande warned, on the other hand, that an overly rigid austerity policy would lead to recession.

At a meeting attended by Merkel, Hollande, Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy last Friday, there was also no agreement at all on the core issues. Hollande wants to collectivize debts in the euro zone as much as possible. Merkel is against the idea, because it would require Germany to make the largest contribution. She would only be willing to make concessions on the issue, she said, if the individual countries agreed to relinquish a substantial share of their sovereignty on budgetary issues to Brussels. Hollande wants precisely the opposite approach, as he emphasized in Rome. For each piece of surrendered sovereignty, Germany would have to move a step closer toward solidarity, the Socialist president demanded.

A Battle for Dominance in Europe

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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