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Photo Gallery: EU Leaders Divide Europe in Half

Foto: Virginia Mayo/ ASSOCIATED PRESS

The Division of Europe EU Summit Paves the Way for a Split Continent

Last Wednesday's summit in Brussels took important steps toward saving the European common currency. But it also made it clear that the European Union is being divided in two. Germany is the new Europe's leader -- for better or worse. By SPIEGEL Staff

At 7:45 p.m., European Council President Herman Van Rompuy could no longer avoid the embarrassing and unpleasant task of throwing out 10 people. Friendliness was called for, of course, and nice words. But so too was firmness: Their presence was no longer required, and they were asked to leave the assembly hall of the Justus Lipsius building in Brussels.

They were all proud people, the sort who usually do the throwing out themselves: national leaders like British Prime Minister David Cameron and Polish Prime Minister Donald Tusk -- all from the 10 countries that are part of the European Union but don't use the euro.

They met last Wednesday with their 17 counterparts from the euro zone to discuss the future of Europe. In reality, though, they complained that the 17 euro-zone nations were embarking on their own path and not involving them sufficiently.

There was no shortage of grievances. Indeed, the full, 27-member session had already taken much longer than planned when Van Rompuy braced himself and asked Cameron, Tusk and the other eight leaders of non-euro-zone nations to leave. He thanked them for the "positive" discussion -- a choice of words which belied the heated atmosphere which characterized the session -- and went about his extremely unpleasant task.

There was a break, and then dinner was served. Now the 17 heads of state and government of the euro zone could finally tackle the important part of the meeting. Over dinner, they discussed how to save the euro.

Two Europes

It was a memorable meeting, and when it finally ended in the early morning hours of Thursday, a program to rescue the euro  had emerged. It revealed the contours of a new Europe -- a divided Europe, with a new border running between those countries which belong to the common currency area and those which do not. In the future, there will be two Europes within the European Union.

One could very well be called Merkel's Europe. The German chancellor played an essential role in creating it, and now the euro zone is the kind of entity she envisioned.

This new Europe has a nearly hegemonic leader, namely Germany. It has a goal, the stability of the euro. And it has a principle that reads: Those who botch their finances stand to lose a portion of their sovereignty. It also has a central administrative body, the European Financial Stability Fund (EFSF), which manages the bailout fund.

Merkel's Europe is a sober, rational creation. As such, it bears a resemblance to its creator, a person with no great vision or passion about matters like peace or culture. Numbers count more than words in this new Europe, which is not a community of fate but one of convenience. And yet it is also true that if the euro zone turns out to be a success, it could help make Europe more effective overall.

The financial markets reacted positively at first. But everyone knows how volatile the situation is, which is why the German government's initial reactions to the outcome in Brussels were skeptical. "There will be no single solution during this process," German Finance Minister Wolfgang Schäuble said in an interview  with SPIEGEL. "We still have a long way to go before all problems are solved."

German Money

But there is a general sense, if only temporary, of satisfaction. At the moment, it looks as if Merkel has done a relatively good job .

The chancellor supported a national strategy from the start. She didn't want to be Europe's savior. She wanted to protect German money to preserve Germany's competitiveness on global markets -- while perhaps saving Europe in the process.

If she had said from the beginning that the Germans, with their financial clout, would support the rest of the euro zone unconditionally, she would now be a celebrated European, and the events of the last few months would have unfolded more harmoniously. But that wasn't an option. Over a year ago, Merkel said that EU member states would not make enough of an effort if Germany proved to be too generous. And it is a motto she has stayed consistent to since.

That was her strategy: To encourage the other nations to make an effort. The Germans would intervene, but only if the problems still remain unresolved. The strategy has led to several achievements. For one, the Spaniards, Greeks, Portuguese and Italians have introduced austerity programs, some of them painful, to clean up their government finances. The German stability culture is gradually becoming dominant in Europe.

What Merkel demonstrated most of all this year is her stubbornness and rigidity. When it comes to votes, Merkel is as pliable as wax. She doesn't like to demand much from Germany's voters. But when it comes to demanding sacrifices from others, she can be relentless.

Stragglers and Second-Tier Nations

There were periods in this process when Merkel was sharply criticized abroad  -- in both the United States and Europe -- as well as at home by the opposition and the media. Everyone, it seemed, wanted Germany to finally take a leadership role, which, for some, really meant that it was time for Berlin to pay up. But Merkel remained persistent. She is less fearful of someone like US President Barack Obama than of German voters.

But the price of her success in Brussels is the division of Europe. Those countries that are not part of the euro zone are now no longer part of a core Europe, and are now being asked to leave the room when the truly important issues are being debated. While the 17 euro-zone members walk at the front of the pack, the 10 non-euro-members are forced to walk behind, like stragglers and second-tier nations.

And now they have it in writing. In the closing document of last week's summit, euro-zone member states grant themselves the right to work together more closely without having to wait for the non-euro countries. The EFSF also deepens the divide. It is a facility set up by the 17 countries in the monetary union for the 17 countries in the monetary union.

Indeed, the European flag, the symbol of the European Union, doesn't fly in front the EFSF headquarters on John F. Kennedy Avenue 43 in Luxembourg. Only the blue-and-yellow colors of the logo indicate the relationship between the EFSF and Europe.

The 17 euro-zone leaders decided to make the bailout fund and its director, Klaus Regling, even more important in the future. Regling will receive more power and influence, as well as more money. He will become the nucleus of a new Europe driven by fiscal policy.

Germany Takes the Lead

A total of €440 billion ($625 billion) were available, and after bailout programs for Portugal, Ireland and Greece, €250 billion are now left. This sum will now be boosted to about €1 trillion to provide faltering countries like Italy and Spain with liquidity assistance.

Two methods of leveraging are allowed. The first works like first-loss insurance. The EFSF guarantees investors that it will absorb a portion of the losses if Greek, Spanish or Italian government bonds get into trouble. If, in such a case, the EFSF absorbs the first 20 percent of losses, these countries' bonds become more attractive. The reasoning is that one euro from the bailout fund could be used to attract four more euros in private investment.

In the second method, the bailout fund, together with other private or public investors, invests in a special-purpose vehicle that buys up the bonds of ailing countries. This offer targets, in particular, the billions in the sovereign funds of countries like China and Brazil, which are seeking investment opportunities worldwide.

Should EFSF chief executive Regling attract the interest of investors with this sort of offer, his organization will end up with nine times as much money at its disposal than the European Commission. This too is an indication of the new balance of power.

The planned debt haircut for Greece also reveals the contours of the new Europe. The European Commission played only a secondary role in the matter, and non-euro countries like Sweden, Great Britain and the Eastern European nations were sidelined completely.

Far from a Healthy Number

The member states of the monetary union, most of all Germany, set the tone. Merkel and Finance Minister Schäuble pushed for a more drastic debt reduction, and they succeeded. Greece's private creditors, particularly banks and insurance companies, are now being asked to voluntarily waive half of their claims. Government creditors, most of all the European Central Bank (ECB), are spared. The expected consequence is that Greece's national debt will decline from the current 160 percent of annual economic output to 120 percent by 2020.

That is still far from a healthy number. Italy, with a debt-to-GDP ratio of 120 percent, is considered to be approaching crisis  as well. But the appeal of the solution is that Italy cannot now demand its own debt haircut, citing the treatment of Greece, to easily rid itself of a portion of its debts. One hundred and twenty percent is now more or less defined as a tolerable value.

But it's still too high, which is why the planned program for Greece is no reason to celebrate. Bad news will keep coming from debt-ridden countries, and the crisis summits will continue. The euro is safe for the moment, but it hasn't been stabilized for the long run.

And then there are the problems that having two Europes within the EU raises. The deal the EU heads of state worked out among themselves turns the EU into a two-class society. In addition to the European Commission, which represents all 27 member states, a new "Euro Summit" group is to be established. This club of the 17 euro-zone nations will meet "regularly, at least twice a year." Van Rompuy, president of the powerful European Council comprising of EU member state leaders, will also be appointed "President of the Euro Summit." The euro task force of top officials from all member states will also get a full-time chairman. This, together with the EFSF and the ECB, creates a strong second structure alongside the European Commission.

At the EU summit on the Sunday before last, British Prime Minister Cameron said that the resolutions planned by the euro-nation leaders would have "serious consequences" for the remaining EU countries, and that "the crisis in the euro zone is having an effect on all our economies."

Just as Annoyed

Cameron demanded that a clause be inserted into the results that would give the 27 EU countries the right to block decisions by the euro summit. The other non-euro members were sympathetic with Cameron's idea at first, but French President Nicolas Sarkozy managed to dissuade them from supporting the veto plan, arguing that only the British and the Danes had in fact made the fundamental decision not to join the euro. All others had committed themselves to joining the monetary union in the medium term. "This is not in your interest," the French president said, his words directed at the Poles, Czechs and other euro candidates. Van Rompuy dismissed the British foray as well.

The French president also lost his temper at times and directly attacked the British prime minister: "You missed a good opportunity to keep your mouth shut," Sarkozy huffed. "We are sick of you criticizing us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings."

Such outbursts are not Merkel's style, and yet it is clear she has been just as annoyed by Cameron in recent months as Sarkozy has.

The €440 billion in the bailout fund are coming directly from the budgets of the euro member states, and yet the British prime minister demanded that the leverage effect of the EFSF be increased to "two trillion." On the other hand, the countries of the monetary union depend on the goodwill of the other EU members. For example, a meeting of the 27 EU members was needed last Wednesday to ratify the plan to recapitalize the banks.

To calm things down on both sides, the wording that was finally included in the results of the "euro summit" was intended to avoid a split within the EU. "The governance structure for the euro area will be strengthened, while preserving the integrity of the European Union as a whole," paragraph 30 reads. This sounds good enough, said Polish Premier Tusk, but "what does it mean in practice?"

He was not given an answer, but it will probably look like this: The British will have to think about whether they want to remain in the EU at all. There is a strong movement among the Conservatives to withdraw from the union. And most other non-euro EU members will keep their noses to the grindstone so that they can soon be part of the core club.

Protecting German Money

As such, Germany now has the Europe it wanted. It remains to be seen whether it will be happy with the outcome.

A German Europe arouses old and new resentments among the country's neighbors. It is a shift that has been particularly obvious in Greece and Portugal in recent months. In the past, many citizens were quick to blame "Brussels" when something went wrong in their countries. Now "Berlin" is turning into the new expletive.

This is why all German governments to date have tried to disguise their own interests and ambitions as European or trans-Atlantic. It was a smart strategy, because Germany's partners don't want to see a boastful Germany. They're afraid of it. But Merkel has paid little attention to such concerns, preferring to protect German coffers than the tempers of others.

In return, she now has to live with a Europe that doesn't suit Germany economically at all. In contrast to Germany, the Mediterranean countries -- which have a strong presence in the euro zone -- have a tendency to favor state-run industrial policy and protectionism. Berlin's important allies in the fight over free trade and a uniform domestic market, like the British, have now been relegated to the periphery. And in many respects the Germans have more in common with the Poles, Danes and Swedes than with the Greeks, Spaniards and the French. But their voices will not be as important from now on. As a result, Germany will be integrating with countries whose economic culture is particularly foreign to its own.

"We need a new bracket that connects the euro zone and the European Union," says Ulrike Guérot, the German head of the influential European Council on Foreign Relations. "Otherwise we'll lose the EU because we rescued the euro."

Another problem is that the leading power, Germany, lacks political stability. The two parties in its coalition government, the conservative Christian Democratic Union (CDU) and the pro-business Free Democratic Party (FDP), can't even agree on a minor tax reform, and the FDP still has to survive a membership vote over the permanent bailout fund, the European Stability Mechanism (ESM). And, once again, Germany's Federal Constitutional Court has expressed doubts over the manner in which the parliament is involved in crisis policy. The hegemon is looking a little pale on the domestic front.

Subduing the French

At the European level, the German government is still moving full-steam ahead. Its next goal is to amend the Lisbon treaties that regulate the structures of the EU.

In a letter to FDP members of parliament, Foreign Minister Guido Westerwelle mentioned a few reforms. They include automatic sanctions for euro-zone members that violate budget deficit limits, which the Commission is to impose, and over which the member states would have no veto. In addition, the Commission and individual euro countries are to be allowed to file legal action against a country's budget at the European Court of Justice. A stability commissioner is to be given the power to withhold funds from the Structural Fund and Cohesion Fund if a country violates its obligations, limiting access to coveted EU subsidies.

The German Foreign Ministry wants to see the ESM transformed into a monetary fund, which could smooth the way for a national bankruptcy. The clearest path to this goal is that of amending the treaties, the ministry said. If this is not politically feasible, the Foreign Ministry argues, a treaty among euro-zone countries ought to be considered.

Merkel's Europe amounts to one underlying rule: Those who do not toe the line will be punished. President Sarkozy smiled sardonically when he was asked in a press conference whether he trusted Italian Prime Minister Silvio Berlusconi. The smile came from the very top, but Sarkozy hasn't been there in a long time. He had completely different plans for the euro zone -- he didn't want a drastic debt haircut for Greece, for example. But he was unable to assert himself, because of another principle in Merkel's Europe: Those who pay make the rules.

It all sounds like an irony of history: The French wanted the euro to subdue the Germans. Now the euro is helping the Germans to subdue the French.

BY DIRK KURBJUWEIT, RALF NEUKIRCH, CHRISTIAN REIERMANN and CHRISTOPH SCHULT

Translated from the German by Christopher Sultan
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