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The woman who is at the heart of the struggle to calm the financial markets, and stabilise the common currency shared between 17 members of the European Union, is facing the most critical week of her chancellorship, just halfway into her second four-year term.
When the Bundestag votes on Thursday on increasing guarantees underpinning the European Financial Stability Facility – the €440 billion eurozone rescue fund – there is overwhelmingly likely to be a big majority in favour. That is thanks largely to the support of the opposition Social Democrats and Greens. If so, it will not reflect popular opinion. Polls suggest that 75 per cent of voters are against the move, which would raise Germany’s part of the EFSF guarantees from €123 billion to €211 billion.
The Bundestag decision – along with votes in the parliaments of all other eurozone members – would extend the powers of the EFSF into territory regarded with dismay by most orthodox German economists: buying sovereign bonds of debt-laden eurozone partners in the secondary market; recapitalising European banks; and providing liquidity loans to countries facing soaring borrowing costs.
Those are moves that parliamentary rebels such as Frank Schäffler, the leading dissident in the FDP, abhor. He believes they are inexorable steps towards what Germans call a “transfer union”, where one Member State will effectively be responsible for guaranteeing the debts of others.
On the other side, Ms Merkel faces strong criticism from the opposition that her eternally cautious approach to the eurozone crisis has made matters worse, while encouraging popular doubts about the measures at home. Prof Henrik Enderlein of Berlin’s Hertie school of governance commented: “Adopting this package is important, but it is certainly not enough. What I miss is someone prepared to take the lead. When push comes to shove, what is most important for the chancellor: saving the coalition, or saving the euro?”
Ms Merkel has made clear that saving the euro, and stabilising the eurozone, is a priority. “If the euro fails, Europe will fail”, has become her mantra. Yet her response has been an uncomfortable balancing act between short-term fire-fighting and working on a long-term strategy to set in place the tools and institutions needed to head off future disasters.
In an hour-long episode of Germany’s most popular television chat show on Sunday, she repeated that the only solution to the eurozone crisis was a “step-by-step” approach. “We are buying time for these countries to get their fiscal position in order”, she said. There would be no instant magic solutions – neither the introduction of bonds backed collectively by all eurozone members; nor allowing Greece to default on its sovereign debt. The debt crisis had been building for decades, and the solution would also take years. This step-by-step approach reflects her cautious character. It is also a response to the sheer complexity of the political balancing act in which she and Mr Schäuble are involved, both in Berlin and between Berlin and Brussels.
Jens Weidmann, Ms Merkel’s former economic adviser and now Bundesbank president, has recently suggested that “a major shift to fiscal union, including a fundamental transfer of key areas of responsibility from national parliaments to democratically legitimised European bodies” is a viable way forward. He sharply criticised the current halfway house as “leading us in a direction that is not sustainable in the long term”.
Ms Merkel has said treaty change is necessary. That could open the way to closer tax harmonisation in the eurozone, and better eurozone-wide regulation. It could also create irresistible pressure for the introduction of jointly guaranteed eurobonds, however much Berlin may object.
Ms Merkel is nothing if not stubborn. “She is very tenacious and persistent”, says Professor Jürgen Falter of Mainz university. “She knows that she has already had some success on the European level – such as persuading France, Spain and even Italy to introduce ‘debt brakes’ in their constitutions, as we have in Germany. This gives her courage to believe that the wheel is turning, very slowly.”
The question is whether it can turn fast enough to restore the confidence of the markets.
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