The World from Berlin 'The EU Is Threatened by a Corrosive North-South Conflict'

German Chancellor Angela Merkel made an important visit to Rome Wednesday after her setback at the latest summit in Brussels, orchestrated by Italy and Spain. Although many in Berlin think Merkel's concessions made her the loser in the talks, some German editorialists believe the current shift in the balance of power could actually help the European Union.

German Chancellor Angela Merkel and Italian Prime Minister Mario Monti tried hard to emphasize "excellent" relations on Wednesday.

German Chancellor Angela Merkel and Italian Prime Minister Mario Monti tried hard to emphasize "excellent" relations on Wednesday.

The visit to Rome on Wednesday couldn't have been entirely comfortable for Angela Merkel. Less than a week before, Italian Prime Minister Mario Monti had succeeded in extracting significant concessions from the German chancellor at a high-stakes European Union summit in Brussels. Back at home, many politicians in Berlin have accused Merkel of buckling and allowing southern European countries to outmaneuver her in ways that could have a lasting effect on the balance of power in the ongoing efforts to save the euro.

With the support of the leaders of Spain and France, it was Monti who prevailed over the chancellor. But, during their meeting at Rome's Villa Madama, both leaders tried to play down any major discord between their countries. Monti said that "unanimous decisions" had been made at the summit, while Merkel added that they were "solutions that are satisfactory for everyone." The leaders spoke of "excellent" relations between Rome and Berlin, and Monti even claimed "our two countries can together relaunch Europe." As face-saving language, it couldn't have been any better.

Monti also assured the chancellor that Rome remains "determined to continue along the path of containing the budget (deficit), fiscal discipline and structural reforms with a view (toward achieving) growth that will hopefully come as soon as possible." Just one week ago, Italy passed a package of labor reforms that will make is easier for companies to hire and fire employees, and it is planning to introduce public-sector spending cuts. Merkel praised Italy's structural reforms as "excellent."

Still, it remains clear that relations between Monti and Merkel are not what they were when the former European Central Bank official rose to head a technocratic government in Rome only a few months ago. Initially, the Italian leader had supported austerity measures and structural reforms. However, under considerable public pressure, he has slowly veered from Merkel's austerity policies. Instead, he has recently been pushing for euro bonds and a joint debt-repayment fund.

Although he didn't succeed on those fronts in Brussels, he did manage to prevail over Merkel and cut a deal that would see the permanent rescue facility, the European Stability Mechanism (ESM), be given the right to purchase government bonds from countries beleaguered by soaring risk premiums, provided they are abiding by EU budget rules, as well as allowing it to bypass governments by providing direct aid to ailing private banks. In addition, the European Union will create a centralized banking regulator and may also set up a Europe-wide deposit insurance scheme. All of these programs could lead to the kind of debt-sharing that detractors of the euro bailout in Berlin have warned against.

On Thursday, editorialists at two major German newspapers examine relations between Merkel and Monti as well as the scope of the North-South divide in Europe:

The center-left Süddeutsche Zeitung writes:

"Merkel was caught by surprise in Brussels by the decisiveness of an Italian-Spanish alliance that had been backed by France. It served to prove that, without partners, Germany is also weak."

"One shouldn't draw comparison between the summit and the (1814-1815) Congress of Vienna (which redrew the European map). No borders have been moved, and no new powers have emerged. The balance of power has just shifted a little -- particularly between France and Germany after Sarkozy was voted out of office -- as commonly happens after several changes of government. For now, the Franco-German motor that many have relied on in the EU is missing. One possibility would be to put hope in Franco-Germany regularity -- in other words, that Angela Merkel and Francois Hollande, out of necessity, will find their way to each other."

"Although it is likely they will do so, for some time now, Europe hasn't been able to fill the hole created by the absence of Merkozy (Merkel and Sarkozy) with some type of Frangela (Merkel and Hollande). The EU is threatened by a corrosive north-south conflict that could eat away at everything achieved so far in European integration. One ingredient in it is an unshakable conviction among Germans, which has also been fostered by the government, that the crisis has been created solely by lazy southern Europeans who have lived beyond their means. The other ingredient is the view that the Germans, as the key beneficiaries of the euro, have been living at the expense of other countries."

"No bailout can save the euro if the EU can't overcome this distrust. But, under these circumstances, the shifting in the balance of power in Brussels could provide a major opportunity. Merkel has shrunken back to human scale, which by itself could be helpful as a trust-building measure. On a personal level, she might resent Monti for using a few tricks during the summit; but, politically, she needs an alliance with him almost as much as she does with Hollande. That's why Merkel's trip to Rome ... was so important. At the end of the day, this is a question of whether Europe can still hold together."

The business daily Handelsblatt writes:

"On the surface, it looks like German-Italian relations have taken a drubbing. After the Germans lost their Euro 2012 football match against Italy last week, some thought they lost another goal in Brussels. Some Germans believe Monti wants to get hold of their money. They also erroneously believe that Italy is already a recipient of funds from the European bailout programs."

"In fact, both countries and both leaders are a lot closer than people might think. Germany remains Italy's most important trading partner. … Germany exports more goods to Italy than to China. It is in the interest of both countries for Italy to experience growth."

"Since he took office, Monti has pushed through more reforms than almost any of his predecessors. … It is understandable that the prime minister is angry that the financial markets are punishing Italy with (high) risk premiums on government bonds rather than rewarding those steps. He would prefer to spend his money on growth and debt reduction rather than on larger interest rates. That's why he softened -- or some say blackmailed -- Merkel at the summit to allow the rescue fund to purchase government bonds from countries that have done their homework but are still being subjected to high risk premiums."

"What's more, when it comes to budgetary discipline, Monti is closer to Merkel than Hollande is. The chancellor knows this and must support Italy as Germany's most important partner. If Italy continues with its reforms, it is an argument for German voters to make certain concessions."

"Merkozy will not be transformed into a Merkonti. But a marriage of convenience would be the most prudent path."


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