Boyko Borisov cuts an imposing figure. The Bulgarian prime minister has the build of a piano mover, and he used to coach his country's national karate team. He towered over German Chancellor Angela Merkel while walking with her through the Chancellery in Berlin.
Indeed, he almost seemed like a Merkel bodyguard during his visit to the German capital last Wednesday, particularly when the subject of the euro crisis came up. For days, Italian Prime Minister Mario Monti has been insisting that Germany needed to do more to save the common currency. But Borisov, in contrast, told his audience that he would like to "thank Germany … on behalf of many countries in the European Union." He said that what was important now was budget consolidation, to only spend as much as is brought in and to save, save, save.
"Everyone has to work as much as the Germans," he added.
Merkel nodded with satisfaction. Finally someone was showing some understanding for once. Then she took her earphones off and addressed Monti's repeated demands. "I'm still searching for what else exactly we are supposed to do," she said. And when she figures that out, she added, she'll actively pursue it.
'Isolated Measures Here or There'
A large alliance of the finance ministers, heads of government and central bankers from almost all of the 17 euro-zone member states has been calling for the European Stability Mechanism (ESM) to be enlarged -- significantly. The permanent euro backstop fund, which will go into effect this year and will ultimately replace the temporary European Financial Stability Facility (EFSF), needs to encompass fully €1 trillion ($1.3 billion) instead of the planned €500 billion, Italian government officials have told their German counterparts.
At the same time, widespread resistance in Brussels to German plans for a new system of financial regulation within the EU is becoming more assertive. Merkel's proposal for all EU member states to pass balanced budget initiatives -- known in Germany as a "debt brake" -- has been torpedoed as has the idea to allow the European Commission to bring countries that stubbornly violate deficit rules before the European Court of Justice.
Belgium Prime Minister Elio di Rupo says that politicians are currently trying to "solve the problems of each country and of Europe with slogans." But, he adds, "one can't solve the euro zone's most important problems with isolated measures here or there."
Just a week before the next EU summit will be held in Brussels, Merkel is facing yet another test of her power. She has pledged to Germans that she won't invest another euro in efforts to rescue the currency. But, in the rest of Europe, the grumbling of those who claim that Germany is trying to dictate economic and financial policies to the rest of the EU is growing louder.
"The split is dramatic," Danish Prime Minister Helle Thorning-Schmidt complained last week before a small group in Strasbourg. "That is being massively underestimated in Berlin."
Expert Support for Monti
Indeed, the balance of power in Europe has shifted. As long as Italy was ruled by a clown like Silvio Berlusconi, it hardly had any voice in efforts to save the euro. But ever since Monti, a respected financial expert, took over, the front of Merkel opponents is stronger than ever, all the more so because quite a few experts endorse Monti's position.
Monti, too, would like to see additional money be used to bolster the euro bailout fund, to send a calming signal to the capital markets. A professor of economics, Monti insists that Italy has no intention of asking for help. But bolstering the bailout fund would create confidence, he believes, which in turn would lower the risk premiums on his country's sovereign bonds. Yields on the bonds of other cash-strapped countries would also fall, he says.
The governments of Spain and Portugal agree. In confidential crisis meetings, they have long argued that financially healthy euro-zone countries should make larger contributions. It was a point they pushed at the most recent European Council meeting on Dec. 9 in Brussels, and nothing has changed since.
Southern European countries have yet another advocate, one who is generally considered to be an ally of Merkel's. French President Nicolas Sarkozy has repeatedly urged Merkel to be more generous. Germany must leverage its economic and financial power to assist the common currency, Sarkozy insists. If Merkel refuses, he warns, then Germany will be held responsible should the euro collapse.
Sarkozy is now getting the support of prominent economists from around the world. Christine Lagarde, the head of the International Monetary Fund (IWF) is calling for more money for the euro backstop fund as is Mario Draghi, the president of the European Central Bank (ECB), who has been in regular contact with his compatriot Monti. In a Monday appearance in Berlin, Lagarde said "we need a bigger firewall."
The Challenges Facing the Most Indebted Countries
Draghi is backing a proposal that could very well lead to a compromise. The plan envisions not carrying over the €250 billion in unused EFSF funds to help make up the €500 billion in total funding being allocated to the permanent ESM fund. Instead, the unused funds would be added on top of that planned for the ESM, bringing the total available funding to roughly €750 billion.
Despite the growing pressure, Merkel and her finance minister, Wolfgang Schäuble, haven't budged. They point to an agreement made at the last EU summit stipulating that there would be no scrutiny of whether the ESM had sufficient funding until March.
They argue that there is absolutely no reason to deviate from this timeline. After all, they note, the situation on the bond markets has finally relaxed, and yields on Italian and Spanish government bonds have dropped despite the fact that rating agency Standard & Poor's recently downgraded the credit rating of both countries. In effect, they argue, this means that the governments of Southern Europe can already borrow for less.
But Monti doesn't want to trust that things will stay this way. When he visited Merkel in Berlin two weeks ago, he said that the reform process in Italy was encountering difficulties. Not only were economic developments threatening the future, he explained, but there were also increasing political risks. Although he didn't elaborate on what he meant, everybody already knows: Berlusconi, his political predecessor in office who is responsible for years of economic stagnation in Italy, is preparing his comeback.
Since nobody in Europe wants to see Berlusconi back in power, Monti senses he has more political support. He argues that, since Germany benefits from the euro "more than others," it is "in Germany's interest" to help Italy and the other heavily indebted countries by making it cheaper to refinance their mountains of debt.
Teaming Up Against Germany
Monti's statements have been met with growing displeasure in the Chancellery. But Monti believes he has a very good chance of softening up Merkel -- especially if he teams up with France. Merkel has been able to repeatedly stonewall French calls for a change of course. But now, as the Italian daily La Repubblica quoted a Monti adviser as saying after his visit to Paris in early January, "La Merkel has to understand that we are now two."
The Germans discovered just how well the French-Italian duo could work together during last week's talks about the proposed fiscal pact. Indeed, without their support, Berlin failed to push through any of its key demands.
The main demand to fail in the face of opposition from the other countries was that calling for debt brakes to be written into the national constitutions of all euro-zone countries. In previous negotiation rounds, German officials had insisted that debt brakes be adopted. But, last Thursday, they were forced to concede defeat.
Irish government officials had warned that writing this provision into the constitution would require them to hold a referendum -- and everyone participating in the talks understood this warning for what it ultimately was: a threat. A referendum on the island has already stopped a European treaty in its tracks once previously.
The most recent draft of the fiscal pact is correspondingly weak. The document proposes that member states be obliged to adopt a "binding and permanent" debt brake into their national legal systems, but then it qualifies this by saying these provisions should be "preferably constitutional" or merely "otherwise guaranteed to be respected through the national budgetary process."
Berlin also had to give up its call for allowing the European Commission to bring individual deficit offenders before the European Court of Justice. This would have contradicted EU law, which stipulates that a simple pact between individual states cannot define the role of an EU institution. As one EU diplomat assigned to the talks says, in actuality, the pact will bring about absolutely no change in budgetary policies.
Anger, Disappointment, Confusion
There is growing disappointment in Germany, as well. "The cornerstone for a genuine fiscal union has yet to be laid," complained Jens Weidmann, the president of Germany's central bank, the Bundesbank, last Wednesday in Berlin. "For now," he told his audience of politicians from Merkel's center-right Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU), "there will be no genuine rights to intervene in national legislation, even in cases of continued fiscal misconduct."
Likewise, there is much anger about the way the Germans have led the negotiations, not only in Berlin, but particularly among EU politicians in Brussels. All of them understand that the Germans want to hold on to their money. But hardly anyone can fathom why Merkel would insist on having provisions in the pact that are of questionable legality or meaningless when it comes to financial policy.
Indeed, many are puzzled as to why the Germans are even opposed to the kinds of proposals that would promote economic recovery without costing them anything at all. For example, when Monti recently suggested loosening the rigid service-sector labor market throughout Europe, the Germans brusquely rejected the proposal.
Yet no one disputes how important economic growth is for resolving the debt crisis. A team of researchers led by Henning Klodt at the Kiel Institute for the World Economy have corroborated this view. The economists believe the euro crisis has not been permanently resolved. On the contrary, were the economy to significantly soften, it would make the crisis even worse.
For each of the euro-zone's 17 member countries, the team of economists has also calculated how much government revenues must surpass expenditures in order to allow their finance ministers to keep making interest payments on their debts both now and in the years to come. Klodt's team gives the all-clear to most countries -- even France, despite Standard & Poor's recent downgrade.
"The markets' appraisals are much worse than the actual budgetary situations," Klodt says, adding that the same holds true for Spain. "If the yields don't keep going up and there is a return of growth, it will soon get its debts under control."
A Possible Silver Lining for Italy
But Klodt's calculations also show just how futile reform efforts are in some of the most heavily indebted countries. Should growth in Italy not significantly increase, for example, the country will have major problems paying off its debts on the long term.
Klodt believes that Rome will have to either raise taxes or slash expenditures -- and to a virtually unprecedented extent. According to his calculations, the country would have to devote almost 6 percent of its annual economic performance to its rescue efforts. "Even with the best will in the world," Klodt says, "that's still utopian."
Klodt also believes that Portugal's situation is downright bleak. If the economy doesn't pick up there, he says it will also be essential for debt to be slashed as in Greece. His calculations indicate that those who have invested in Portuguese debt would be forced to waive more than half of their claims, or over €170 billion, just to give the country a shot at getting its finances under control.
And in Greece, Klodt's team believes it is no longer possible. That private creditors have signaled their willingness to waive a major part of their claims doesn't help, he says. If interest rates on the markets remain at their current level, the country will need to have more than 80 percent of its debts forgiven. Were that to happen, the ECB and other euro-zone countries would lose a lot of money, as well.
For Italian Prime Minister Monti, the economist who once studied under Nobel Prize laureate James Tobin, there is only one way out. "There will be a European growth initiative," he says, and refers to the one country in Europe in better economic condition than all the rest: Germany.
"The bigger you are," he says, "the more responsibility you have."
BY SVEN BÖLL, CHRISTIAN REIERMANN, MICHAEL SAUGA, HANS-JÜRGEN SCHLAMP and CHRISTOPH SCHULT