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Germany: Europe’s ‘Indispensable Nation’

By Elizabeth Pond

Will the eighth European Union summit in the two-year serial of repetitive "last" chances finally stop market attacks on the eurozone? Nobody knows for sure. But what we do know is that last weekend's European Council crowned the German chancellor as the continent's leader, for the first time since 1945. Only one of the EU's 27 members—Britain—voted against Angela Merkel's radical vision of European fiscal union with strict and enforced budgetary discipline.

Observing the scene, columnists trumpeted that Henry Kissinger now has his long-sought telephone number for Europe, and that number rings in Berlin. Germany is now the continent's "indispensable nation," concluded Radoslav Sikorski, noting that he must be the first Polish foreign minister in the two nations’ hostile history to plead for more German dominance rather than less.

This was not always so. As recently as late September, Chancellor Merkel was seen domestically as a passive has-been. And internationally, Germans were reviled as selfish nationalists who had pocketed their unification when the Cold War ended and were now forcing austerity on poor Greeks while refusing to pay for the crisis of the single currency that has hugely benefited German exports. Things got so bad that Merkel's old mentor, ex-Chancellor Helmut Kohl, broke his decade-long silence in retirement to charge his protégée with forgetting Berlin's European calling.

Just how has Angela Merkel climbed out of history's trashbin into the European limelight in three short months? Indeed, how did the pastor's daughter who grew up in Communist East Germany apprentice herself in democratic politics at age 36 and rise to become Germany's first-ever woman chancellor?

In part, by learning from Kohl the demeanor that beguiled rivals—including Kohl himself in the end—into underestimating her. In part, it was her eye for detail she had acquired as a trained physicist. In part, by the longevity she has acquired as Europe's senior head of government—now that her tough words forced reform-resistant Silvio Berlusconi to retire last month after 17 years as Italian prime minister.

The criticism rings true that long after Athens admitted in 2009 that its real debt was more than double its official statistics, Merkel (like other European leaders) did not take the crisis seriously enough and did too little too late. But she faced daunting domestic opposition to German bailouts of Greece from voters, German courts, and dissident politicians in her own center-right coalition.

Voters were tired of playing sugar daddy. West Germany's north already had funded modernization of the country's south as a constitutional obligation in the 1950s; Bonn voluntarily underwrote the emergent European Community in the 1960s and 1970s; and west Germany poured well over a trillion dollars into modernizing the old east Germany after unification. At the same time, Germany’s constitutional court limited handouts for Greece based on the 1993 euro-launch treaty’s no-bailout clause.

Moreover, outspoken Liberals and allies in Merkel's own governing coalition rejected turning the eurozone into a "transfer union" in which hard-working Germans pay for happy-go-lucky Greeks who retire at 55 and don't pay taxes. Popular discontent grew as Portugal and Ireland couldn't pay back their debts, and Berlin kept doling out additional rescue money. Opinion polls projected a resounding defeat for the chancellor in her 2013 bid for a third term.

Besides, alarm was not Merkel’s style. Her six years in office have exuded caution, pragmatism, and waiting for facts on the ground to change in her favor before making policy decisions. Pundits quickly nicknamed her "Mutti" (mom). She was neither an economist nor a strategic thinker. She had no experience in the ever-more-complex Western financial world—and she almost failed to get reelected in 2009 when the modest economic liberalization that advisers urged her to promote set off a firestorm.

What transformed Merkel's image from laid-back Mutti into Thatcheresque Iron Lady was the spread of financial contagion from the EU periphery to Italy and Spain, Europe's fourth- and fifth-largest economies, in August. At that point the volatile markets threatened to freeze credit and even break up the eurozone, and globalization's explosion of instant mobile money meant that not even Germany and the European Central Bank had sufficient financial reserves to stop any 1930s-like panic run on banks.

In addition, in September Germany’s constitutional court made yet another ruling that—although it approved the earlier German payments to shore up the euro—insisted on parliamentary approval of each new future step. This was a serious barrier to dealing with mercurial markets; it made slow consensus-building among 27 disparate members even more cumbersome if Berlin’s government always had to sound out the Bundestag before it could probe its allies’ reactions to new initiatives. Yet three weeks later the chancellor took to Parliament her fight to raise Germany’s contribution to the ad hoc rescue facility for debt-ridden eurozone states and to let the facility grant liquidity loans, recapitalize eurozone banks, and buy bonds in secondary markets. Significantly, Merkel won a majority not only from the pro-Europe Social Democratic and Green opposition, but also from her own coalition, including chastened Liberal and conservative rebels.

She then emerged from the seventh “last-chance” European summit in October with a package that, while maintaining a ceiling on German liability, promised to apply risk insurance to leverage the temporary facility of €440 billion up to the "bazooka" of €one-plus trillion that economists said was needed to intimidate speculators.

Furthermore, Merkel began campaigning hard to woo the 71 percent of German voters who told Allensbach pollsters in June that they had little or no trust in the euro and the slightly higher numbers who told Infratest Dimap in August that they disapproved of her handling of the financial crisis. Germany benefits greatly from Europe's common currency and must save it, she preached. The euro ended currency uncertainty, tamed European inflation, brought transparency to the markets, and increased German exports. "If the euro fails, then Europe fails," was her stark message.

By November, when Italy’s playboy Prime Minister Berlusconi reneged on his initial promises of national austerity, Merkel sent him packing, and a reform-minded technocratic government replaced him in Rome. Merkel intensified the old French-German EU "motor" that she had revived with President Sarkozy (with the latter in the junior role because of France's smaller economy), and the two presented last week's summit with a checklist for Merkel's long-term vision of joint fiscal governance for the eurozone as a milestone on the way to hoped-for European political union.

The chancellor did not—thanks to Britain's veto—achieve agreement on basing common fiscal governance of the 17-member eurozone on changes in the European Union treaty at a full 27. She had to settle instead for a subordinate new pact on budget discipline among the 26 present and potential eurozone members—and a messy transition time during challenges to the legality of enforcing the pact’s strict budgets through full European Union institutions, with monitoring by the European Commission and adjudication by the European Court of Justice.

Merkel's long-term initiative does not stimulate urgently needed short-term growth, authorize mutualized eurobonds, or otherwise provide a big-enough bazooka to scare off speculators, initial market reactions suggest. It also risks splitting Europe into a two-speed system that could permanently exclude London's voice in shaping the EU's future.

Nonetheless, her rallying of all EU members except Britain to real fiscal governance for the eurozone is stunning. Even two weeks ago, such an accord was unimaginable. Europhiles are already hailing it as the biggest step in integration since the founding of the European Community half a century ago.

Now, it's the only game in town. The neo-liberal Central European partners that London was counting on to join it in opposing common fiscal rules chose to follow Berlin instead.

As Europe waits, perhaps, for a ninth last-chance summit, its telephone number can now be found on Merkel’s homepage—0180 272 0000. Callers should be warned, though. This is not a toll-free number.

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Elizabeth Pond is a Berlin-based American journalist and the author of Endgame in the Balkans.

[Photo courtesy of Flickr user European Parliament]

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