Merkel Caves in to Sarkozy Germany's Allies Shocked by Euro Zone Backdown

German Chancellor Angela Merkel has disappointed her allies in the fight for stricter stability rules for the euro. She gave in again to French demands, in exchange for concessions that may not be realized. Will her lack of a backbone weaken Europe's currency?


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As a physicist, German Chancellor Angela Merkel likes to think in terms of rules, natural laws and the principles of classification. Anyone who violates these parameters reaps chaos and confusion.

Greece's narrowly averted bankruptcy has often served the chancellor as evidence of this wisdom. Years ago, the governments of the euro-zone member states watered down the stability pact and replaced systematic stringency in sanctioning budget transgressions with political arbitrariness. And what occurred as a result? The entire currency system began to totter.

In the wake of the euro crisis earlier this year, the chancellor decided that this should not -- and must not -- happen again. She urged the introduction of a strict monitoring and sanctioning mechanism that would leave very little wiggle room for discretionary decisions. "We favor the highest possible degree of automatism," she said as recently as late September in reaction to an European Commission reform plan, which proposed precisely this approach.

Yielding to French Pressure

But on Monday of last week, the chancellor threw her policies into reverse and yielded, once again, to pressure from French President Nicolas Sarkozy. The French have always had an entirely different vision of a common currency than the Germans. France has always tended to side with the southern Europeans who tend to see Germany's demands for strict stability criteria as a nuisance. Up until now, the Germans have headed the group of northern countries which favor a hard currency and severe penalties for everyone who doesn't respect the rules.

But all this seems to have been thrown out the window now that Merkel has agreed with Sarkozy that, in the future, European finance ministers -- and not the European Commission -- should continue to decide on sanctions for nations that break European Union rules regulating national budget deficits. This political wheeling and dealing lends credence to all the critics who doubt that Europe is capable of drawing the right conclusions from its currency's existential crisis.

Right from the beginning, the euro suffered from a severe birth defect: The euro-zone members did not commit themselves to a joint economic and financial policy. Indeed, the economies of the euro zone continued to drift apart and tensions increased.

Not The First Change of Course

In order to make the euro more crisis-proof, the shortcomings of its founding phase now have to be addressed. The euro-zone countries have to relinquish authority to Brussels, even if that infringes upon their national sovereignty. Furthermore, a mechanism is required to ensure that they abide by the rules.

This is the only way to win back trust in the European common currency. Currently, the euro is buoyed by the weak dollar, but that could quickly change if mistrust returns to the currency markets and investors once again target the euro and its weakest member states.

Then the euro zone would be back where it was this past spring -- on the verge of being torn apart.

This is not the first time that the German chancellor has displayed an elastic loyalty to principles when the European common currency experiences turbulence. Each time she changes course, she sows renewed doubt and confusion.

She initially spent weeks balking at the idea of aiding Greece. In the end, Germany wound up shouldering the largest share of the bailout.

As the euro crisis became increasingly dangerous, and additional countries ran into difficulties, she resisted a bailout package for the entire euro zone. In the end, though, Germany once again had to pay the largest contribution.

Now Merkel has once again caved in -- this time during her meeting with Sarkozy at the seaside resort of Deauville. Her latest U-turn certainly does nothing to instill confidence in the embattled euro. In fact, it doesn't bode well at all for the next meeting focusing on saving the monetary union.

An Italian Proposal

This Thursday, the European Council will meet in Brussels to discuss the work of the task force under European Council President Herman Van Rompuy. It remains to be seen whether the heads of state and government will further undermine the proposed changes or be able to agree on a genuine reform of the monetary union after all.

Last week, Italian Finance Minister Giulio Tremonti demonstrated what the governments of some countries are capable of doing, and thus showed to what extent the concerns of Europe's citizens -- especially the Germans -- are justified. In all seriousness, he called for citizens' debts to be taken into account when calculating the government debt of member states.

His reasoning: Italy, the country with the second highest government debt in Europe, would then enjoy a relatively respectable ranking within the EU -- and wouldn't have to worry about sanctions. But Tremonti, an expert in fiscal law, has made a logical error with his creative bookkeeping idea. Only borrowers themselves are responsible for private debts. They do not pose a risk to anyone else.


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BTraven 10/26/2010
Option II is much better, of course, since the impression that sanctions are democratically resolved upon can be perpetuated while permitting the EU to sanction a violation would have angered all those who think Brussels is a uncontrolled monster that does not handle in the interests of ordinary people. It is a smart decision. It would have been much better had the members states decided to do without any sanctions. A country which is indebted to the chin is not helped with paying a fine. There must be other measures to reduce its debts.
Inglenda2 10/30/2010
2. Merkel twists and turns
Can we expect anything else from a loyal citizen of the GDR, who enjoyed a first class communist education only normally given to privileged persons, but who was ready to jump on to the bandwagon when West- and Middle- Germany were reunited?
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