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Euro area Summit
28 June 2012

John Wyles: Summit will test Merkel's intentions

Germany's chancellor has to decide between greater political union or casting aside the eurozone's stragglers, writes Wyles for European Voice.

The latest German opinion polls show more than 50 per cent wishing for a return to the deutschmark. That proportion would shrink if the consequence was the break-up of the European Union. It is more likely that Merkel would wish for a euro as strong and stable as the old German currency. In the medium to long term, this would be more likely in a smaller currency club, one without Greece, Portugal, Spain and Italy. According to some calculations, the two largest of these economies will need to raise €1.6 trillion up to 2014 to roll over existing debt and cover their budget deficits. If the markets shut them out, the existing bail-out facilities will not measure up. The only resort would be for the ECB to stretch its legal mandate beyond any reasonable limits and buy all Spanish and Italian debt. 

So this summit is the real test of Merkel's intentions. Will she agree to allow the bailout facilities to buy Italian and Spanish debt in the secondary markets and to supply capital directly to Spanish banks in return for undertakings to move towards a political union? Will she give the eurozone more time to commit itself to and launch constitutional reform, or will she simply point Greece, Portugal, Spain and Italy towards the exit? 

Until now it has been assumed that an unmanaged and uncontrolled break-up of the eurozone would deal a grievous blow to European and global economies. But some experts believe that returning the most vulnerable countries to their national currencies would be the basis for rapid economic recovery behind the shield of capital and currency controls, and could even prepare them for re-entry into the eurozone. Could the EU come up with and implement such a strategy? Until now, anticipation of events has been so woeful that I doubt whether any such secret planning has been conducted. 

A reshaped, globally competititive eurozone based on fiscal discipline and a system of governance that falls short of actual political union would be closer to the German peoples' vision of what is needed. It would also avoid the risk of rejecting a major leap forward in integration by many countries, beginning with the Netherlands and, quite possibly, France. Whichever way she leans, Merkel is gambling with the future of the euro and of the EU. The responsibility is huge. 

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© European Voice

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