Photo Gallery: A French-German Solution


Outcome of Brussels Summit Europe Takes Step Closer to Economic Government

With the new aid package for Greece, Europe's leaders have not ended the battle for the euro, but they have given Athens time. The new bailout also takes the euro zone a step closer to having an economic government. By SPIEGEL Staff.

When French President Nicolas Sarkozy wants to present something as a personal victory to the press, he likes to stand at the lectern, strike a pose and deliver a carefully worded statement. When he did so last Thursday, he was celebrating himself and, as he put it, the "beginnings of a European monetary fund." Sarkozy was the one who was responsible for this initiative.

German Chancellor Angela Merkel's approach to selling a success is a bit different. On Thursday, she held a piece of paper in her hands, looked at it, waved it back and forth a little. "If you want to take another look at this, I will leave it up to you to study it carefully," she said. "Various things are included, such as an exchange of bonds, for example." The listener hardly noticed that she was really talking about an involvement by banks and insurance companies in the Greek bailout. That was the part that Merkel had managed to push through.

The two press conferences were held last Thursday in Brussels after the leaders of the euro-zone countries had agreed on a new aid package  for Greece. It was a joint German-French effort. Both sides had to make some concessions, but each side also managed to achieve part of its aims. Both contributed to the success of the summit. But when it was over, Sarkozy was the only one who came across as having rescued the euro.

Merkel simply isn't good at posing. During a press conference in Berlin the next day, she spoke of her "passion for Europe," a special form of passion that she believes is "quite intense." But that is debatable. Once again, Merkel failed to come up with something powerful to say for Europe. But at least she did contribute, at the technical level, to Europe's moving in the right direction, namely, toward a stronger integration of its economies.

But it is still too early to celebrate.  Although the euro-zone leaders were able to buy time with their decisions, and were able to depart for their summer vacations feeling at least partly reassured, neither Greece nor the euro have been definitely rescued yet.

Ansgar Belke, an economics professor from the western German city of Essen, remains skeptical. "The resolutions (at the summit) will not put an end to the debt crisis. In fact, the risk of contagion spreading to other countries is only likely to grow," says Belke, noting that an "additional, even more substantial debt restructuring will be necessary" in the future. According to Belke, Greece is "still not on a sustainable path."

Split in the Euro Zone

And so the struggle continues. Merkel sees herself as a combatant in the battle to save the euro, a struggle that pits the governments in the euro zone against the financial markets. By staging constant attacks, the financial markets are testing the Europeans to see how long they can stick together and how strong their political will is. Merkel feels that these attacks are legitimate, and that it is up to politicians to put up a fight.

One of the battlefields in this conflict is Brussels, only 15 kilometers (nine miles) from Waterloo, where Napoleon was famously defeated in 1815. European leaders meet in the Belgian capital on a regular basis. Their problem, as even Merkel would agree, is the lack of unity among Europeans. The southern portion of the euro zone is gathering behind France. For these countries, the term "solidarity" is critical. They believe that the wealthier countries, especially the European Union's net contributors -- Germany, the Netherlands and Finland -- should be responsible for the weaker countries and help them in times of need, even if this costs them a lot of money. A European monetary fund would be one instrument for achieving this goal.

The north is gathering behind Germany. For this group, the key term is "competitiveness," a word that Merkel, in particular, keeps bringing up. According to Merkel, Germany is one of the few economies in the euro zone that is fully integrated into global markets thanks to its strong companies. In her view, these companies are exposed to tough competition. But because government spending also imposes a burden on exporters in the form of the taxes and other fees, Merkel wants to spend as little as possible on the hardships of other nations. Most recently, she fought to make sure that private creditors, namely banks and insurance companies, would participate in a new bailout package for Greece.

Germany and France, as the respective leaders of the two camps, are the countries that must agree on a policy. The other countries usually follow suit.

Tense Atmosphere

A familiar scene had unfolded before the Thursday summit, with Germany and France arguing over a new bailout package. On Tuesday, Merkel and Sarkozy agreed that Sarkozy would come to Berlin for the crucial negotiations.

Sarkozy arrived at the German Chancellery around 5:30 p.m. the next day. The mood was noticeably tense, according to sources who participated in the negotiations. Everyone knew that Europe needed a result, as did the rest of the world. US President Barack Obama had called the chancellor to tell her how important rescuing the euro is from the standpoint of the United States.

The two leaders and their staffs met for seven hours, until 12:30 a.m. on Thursday morning, first in the small cabinet room on the 7th floor and later in the dining room on the 9th floor.

After an hour, it became clear that nothing was possible without the participation of Jean-Claude Trichet, the head of the European Central Bank (ECB). After being called, he boarded the last flight from Frankfurt to Berlin, arriving at the Chancellery at 10:15 p.m. By then, Finance Minister Wolfgang Schäuble had also been brought in.

There was little movement on either side in the first few hours. There were arguments, but no voices were raised. Sarkozy was temperamental while Merkel remained calm. The experts did their calculations while the leaders negotiated. Other European politicians were constantly calling or being called.

A compromise began to take shape around the middle of the evening. Once the technical details had been ironed out, the dialogue turned to the political and personal aspects: Were Merkel and Sarkozy prepared to go down this road and stick it out together? Did they have enough confidence in each other?

They did, it turned out. They reached an agreement and then called European Council President Herman Van Rompuy to fill him in on the details of the compromise. A short press release was drafted, and the meeting was ended. There was no sense of celebration or euphoria, just exhaustion.

A European Version of the IMF

At the summit in Brussels the next day, Sarkozy and Merkel managed to push through their program. As a result, the Europeans have now completed a change of course in their bailout policy. Their toolbox to combat crises now contains instruments that the Germans completely opposed just a few months ago.

The resolutions  represent yet another step by the euro-zone countries toward consolidating and centralizing their -- currently fragmented -- competencies in terms of fiscal policy. They have now come a little closer to setting up a common economic government.

The European Financial Stability Facility (EFSF), headed by the German economist Klaus Regling, is being given additional responsibilities and powers. In the future, it will not only be able to help distressed countries; it will also be able to grant loans to countries being targeted by investors, provided this is considered necessary to fend off risks to the monetary union. This measure is aimed at Spain and Italy, in particular. The very existence of the euro zone would be threatened if these two countries were to falter.

With its new powers, the EFSF is becoming more and more like a European version of the Washington-based International Monetary Fund (IMF). In addition, the EFSF -- which was set up in June 2010 in response to the Greek debt crisis and will expire in 2013 -- and its successor organization, the European Stability Mechanism (ESM), will be able to use their billions in the future to protect the banking systems of troubled countries from collapse.

Buying Up Bonds

In the future, Regling will have the authority to intervene in the bond markets to stabilize the euro. The EFSF and the ESM will be able to buy the bonds of ailing countries. This measure is beneficial in two respects. On the one hand, it drives up bond prices. On the other hand, it is an active contribution to reducing debt because a country's debt declines to the extent that the bailout fund removes its bonds from the market.

Private investors will participate in the costs of the bailout by relinquishing a portion of their claims. Under a repurchase program funded by Regling, they will be able to sell their securities at prices significantly lower than the face value to which they would normally be entitled.

In this manner, by 2014, private investors will contribute €12.6 billion ($18.1 billion) to the new bailout package for Greece. However, their overall share of the bailout package amounts to €50 billion. They will pay the rest by extending the maturities of the bonds that are now due, to up to 30 years. Under the current plan, private investors will have contributed a total of €106 billion by 2019.

The euro rescuers assume that 90 percent of investors will participate in the voluntary debt restructuring. According to documents being circulated in Brussels and Berlin, Greece's level of public debt could fall to 110 percent of its gross domestic product by the end of the decade.

'Golden Opportunity'

Can it work? It's quite possible that it can. The banks that refuse to exchange or sell their bonds will also have to write down the bonds in the future. Hence, it makes no economic sense not to participate. In addition, the voluntary debt waiver promises to turn into a profitable deal for the investors in the future. Deutsche Bank CEO Josef Ackermann's claim that "this hits us where it hurts" is all part of the show. In fact, Ackermann and Luxembourg Prime Minister Jean-Claude Juncker worked out the program together.

The financial institutions that participate voluntarily will be expected to write off 21 percent. In many cases, however, this number will be lower because of value adjustments that were already made. Calculations show that Deutsche Bank would face a write-down of about €100 million. "The private sector comes off pretty well," says Thomas Mayer, chief economist at Deutsche Bank. "This deal is a golden opportunity for banks and insurance companies. They should take advantage of it."

The effects on Greece, on the other hand, are modest. The country's debt ratio -- the ratio of debt to gross domestic product (GDP) -- will decline by only 12 percentage points in the first few years.

This means that, under the agreed measures, the debt level will remain at around 150 percent for some time to come. Greece cannot shoulder this burden alone. Deutsche Bank's calculations assume that, under the new conditions, Greece would have to generate budget surpluses over many years merely to arrive at the same, relatively high, debt ratio as Italy -- 120 percent of GDP -- by 2020.

The current situation report by the troika -- as the teams of experts from the IMF, the European Commission and the ECB are known -- also shows how fragile the country's position still is. According to the report, Greece's capacity to support its debt is "on a razor's edge," but it does exist. The ECB representative refused to sign the document, however.

'This Hardly Changes Anything'

Wolfgang Franz, the head of the German Council of Economic Experts, would like to have seen more energetic steps taken. He is critical of the fact that the repurchase program imposes a burden of only €12.6 billion on private investors. "A bigger step would have been needed here to reduce the debt ratio," he says.

"This hardly changes anything for Greece," says Henrik Enderlein, a professor at the Berlin-based Hertie School of Governance, a private educational institution in Berlin. "The country is completely insolvent, but the banks are getting a break."

Bundesbank president Jens Weidmann, who was until recently one of Merkel's top advisers, even sees the euro zone on its way "to the communitization of risks in the case of unsound state finances."

The mood is also divided in the German parliament, the Bundestag. When it votes on the bailout package this fall, Merkel will hardly be certain of having a majority to support her. Her coalition partner, the business-friendly Free Democratic Party (FDP), is particularly unhappy with the resolution. It is adamantly opposed to the bailout fund being permitted to buy bonds on the secondary market.

'Castration of the Bundestag'

Last week, Finance Minister Schäuble was in constant contact with leading FDP politicians to make his case for the controversial legislation. Otto Fricke, a senior FDP politician, is optimistic that a majority will support the package in the Bundestag. "The EFSF can only operate on the secondary market within narrow constraints," he says. "Besides, we achieved a lot in terms of the participation of the private sector."

Others disagree. "The castration of the German Bundestag through resolutions at the European level is being continued," says FDP politician and untiring euroskeptic Frank Schäffler.

Merkel is also encountering opposition from her own party. "This package doesn't help Greece any further. People are already asking about bailout package number three," says Klaus-Peter Willsch, a budgetary expert with Merkel's center-right Christian Democratic Union (CDU). He criticizes the EFSF's ability to buy the bonds of crisis-stricken countries directly. "This arrangement comes dangerously close to euro bonds," he says.

The conservative Christian Social Union (CSU), the CDU's Bavarian sister party, instructed its chairman, Horst Seehofer, to support the chancellor's position. But skepticism abounded at last Thursday's meeting of the party's state organization, at Banz Castle in Bavaria. In the closed-door meeting, Interior Minister Hans-Peter Friedrich questioned whether the Greeks should remain in the euro zone, arguing that without the euro they could devalue their new currency and become more competitive as a result.

Even if Merkel does not gain a majority within her coalition for the vote, the Bundestag will still approve the bailout package -- with the help of the opposition center-left Social Democratic Party. SPD Chairman Sigmar Gabriel calls it a "big step forward," but he is also critical. "We could have had all this months ago, and it would have saved billions."

Gabriel calls it a "failure" that there will still be no financial market transaction tax "despite the fact that there is now substantial support for it at the European level." He added, however, that "this outcome is a huge step on the whole, which is why we will not oppose it in the Bundestag and will in fact vote for it."

On Thursday, there was also criticism coming from European Commission President Jose Manuel Barroso, who said: "We should have adopted these resolutions earlier." Barroso's words were directed toward Merkel, who had long opposed new powers for the EFSF and, as a result, was accused of a lack of solidarity.

Yearning for Grand Words

In recent months, Merkel has had to cause a lot of trouble -- and abandon many positions. Merkel does not deny the latter charge. But she insists that she helped countries like Greece and Spain introduce reform programs with her opposition to quick and comprehensive solidarity. Merkel was always concerned that Germany would keep on paying for countries like Greece, while they would simply continue spending and do nothing to make themselves more competitive.

Addressing the issue at a national press conference last Friday, Merkel said that, in light of the rapid gains being made by emerging economies, "we cannot rest on our laurels." She also said: "Solidarity must be tied to conditions." This is roughly her program for Europe, which is much too small, and yet these two elements are correct.

At the end of this stage of the battle, the yearning remains for more momentous words rather than just Merkel's typical rhetoric. "After tackling the acute crisis, we have to come up with a common language again for why Europe is important," says German Minister of Education and Research Annette Schavan, who is also the deputy head of the CDU. "Merely making reference to the desire for peace in Europe, which influenced the generation of (former Chancellor) Helmut Kohl, is no longer enough."


Translated from the German by Christopher Sultan
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