The Postponement

Underestimated

Last week's EU summit results are widely interpreted by the German media as a defeat for German Chancellor Angela Merkel. The title of the Spiegel Online internet article insinuated that the poker game of negotiations ended "the night, Merkel lost" [1] - that Italy and Spain "nearly completely" prevailed. The daily, "Die Welt" wrote of a German "defeat on a historic night."[2] The influential Frankfurter Allgemeiner Zeitung sharply criticized the Chancellor's tactic, saying Merkel is responsible for the "communicative misery, into which she maneuvered herself and the entire country."[3] Only the state-affiliated "Deutsche Welle" praised that, even though Merkel is "isolated in the EU," with her Europe policy "she is still holding her course despite considerable resistance."[4] This radio station reports from diplomatic sources that the tensions between Berlin and Paris have grown. "We underestimated Hollande," explains a German diplomat, who indicated that the French president is still insisting on introducing common European bonds - the so-called Euro Bonds. We thought he would give in once he had won the elections."

Weakened Abdication of Sovereignty

Friday's summit resolutions, to which the finance markets reacted with an explosive rate of exchange, have, in fact, undermined a principal German crisis policy dogma. The German tandem of financial aid and a continuous abdication of national sovereignty has at least been weakened. Now, the means to be made available by the "bailout" European Stability Mechanism (ESM) beginning in July, can be directly applied for recapitalizing banks, while the credits of the preceding European Financial Stability Facility (EFSF) had until now, only been granted to states under binding conditions. This had exacerbated the national debts of the countries in question, simultaneously obligating them to apply policy measures dictated by Brussels. The new rules, containing no binding conditions for the governments in question, largely comply with the demands made by Spain, which needs 100 billion Euros to stabilize its financial sector. Berlin had insisted on strict conditions, such as a restructuring of the Spanish financial sector under Brussels' supervision, which would have included the sale of many of Spanish bank shares in the industry. The second important summit resolution also undermined the German approach, aiming at the abdication of national sovereignty of the affected countries. In the future, the European crisis countries will be able to tap the resources of the "bailout" and use them, for example, for the purchase of new credits, without having to submit to supplementary austerity conditions. Ultimately, the German government was also unsuccessful in its attempts to impose an important change of personnel: German Finance Minister, Wolfgang Schäuble, was not named successor of the current President of the Euro Group, Jean-Claude Juncker.

German Partial Victory

Berlin had been able to impose several restrictions. The participating countries are obligated to fulfill the conditions of the Fiscal Stability Treaty - particularly, the strict, Germany imposed, austerity policy. Merkel's dictum "accountability and control belong together" - has laid the basis for the summit resolution on a European banking supervision, which is to be created by the end of the year. Only when this control agency, with participation of the European Central Bank (ECB), is functional, will the ESM be able to provide banks with direct recapitalization resources. German government coalition politicians were quick with reassurances that the new rules still permit an intensive German control over the crisis countries. "The Bundestag always has the last say," declared conservative whip Volker Kauder.[5] There will be no ESM subventions without "self efforts" on the part of the recipients. This refers to the buying of state bonds as well as to the direct recapitalization of banks. "During our watch, the ESM will not degenerate into a self-service shop." Other voices disagree. Now, Germany only has "the perspective" that "the ECB takes over banking supervision - that same ECB, at which the representatives of the German Bundesbank have repeatedly been overruled for months."[6] The EU is steering toward becoming a "debt union."[7] Nevertheless, Berlin still landed a clear victory in its Fiscal Treaty conflict with Paris. Even though French President Hollande maintains a confrontation course with Merkel on the Euro bonds issue, after the summit, he announced his intentions to have France ratify the Fiscal Treaty. Originally, he had made this step dependent upon renegotiations. The president's change of heart on this important issue, came "after the EU summit's resolutions" according to the business press.[8]

Break the Vicious Circle

Berlin could be compelled into making concessions, only through the coupling of enormous diplomatic pressure with the deteriorating situation on the financial markets. The Spanish and Italian heads of government had threatened to completely block all summit decisions, if no steps were initiated to alleviate the debt crisis in southern Europe. Italy's Prime Minster Mario Monti even spoke of resigning and of the disorderly collapse of the Euro zone, if Euro-skeptic forces should come to power in Italy.[9] An uncontrollable escalation of the European debt crisis - and the collapse of the Euro zone - could indeed have resulted from a breakdown of the summit in Brussels. The austerity policy, imposed by Berlin, had pushed Spain and Italy into a corner. The intermediate term, unsustainable level of interest rates on the government bonds of both countries, combined with an escalating recession, render fiscal consolidation impossible and financial relief necessary. Europe's banks and countries are caught in a fatal crisis symbiosis. Because of their acquisition of government bonds, in the case of national bankruptcy, the banking sectors would inevitably plunge into the abyss. To prevent this, the states would have to support the banking sector by taking on more credits. In their summit declaration, the Euro zone leaders declared that the agreement on facilitating deficit financing for states and banks is "imperative to break the vicious circle between banks and sovereigns."[10]

"A Battle Won, but not yet the War"

If Berlin would have insisted on its approach it would, in fact, have provoked an extreme escalation of the European debt crisis, threatening unpredictable and uncontrollable consequences. Berlin's austerity course has not only been dealt a heavy blow economically but also as an instrument of power. Confronted with the disastrous consequences of her sustained austerity dictate, Merkel was compelled to make concessions. The Chancellor "peered deep into the abyss," according to one commentary [11] - and partially yielded only when faced with the imminent possible collapse of the Euro zone. Last week's crisis summit has only postponed for a short period, the dynamics of the crisis. With its 500 billion Euros, the ESM is clearly too small to permanently stabilize the European financial sector and to maintain the southern European countries' interests at a low level. The shifting of the political power constellation to Berlin's disadvantage can be seen as the summit's most important result. For the first time since the beginning of the crisis, an alliance comprised of France, Italy and Spain has succeeded in wresting substantial concessions from the German government. As the Spanish press wrote, not yet the "war" but at least "a battle has been won" - even though the battle will "still take years." The EU still lacks particularly "a solid agreement and a political leadership to rapidly disburse Euro bonds that really can prevent investors from speculating against the weakest Euro countries."[12] Recently, the German chancellor definitively ruled out German approval for the introduction of Euro bonds.

Other reports and background on the Euro crisis can be found here: The Germanization of Europe, From the Crisis, Into the Crisis, Europe, the German Way (II), Now German will be Spoken, Impoverishment Made in GermanyCamouflage and Deception and All or Nothing.

[1] Mario Monti: we have a week to save the eurozone; www.guardian.co.uk 22.06.2012
[2] EZB soll für Euro-Retter Bonds aufkaufen; www.ftd.de 21.06.2012
[3] Spanien und Italien läuft die Zeit davon; www.handelsblatt.com 21.06.2012
[4] Drei gegen Deutschland; www.spiegel.de 22.06.2012
[5] Deutschlands neue Rolle als Krisen-Sündenbock; www.welt.de 11.06.2012
[6] Greek Election on Sunday Looms Large, whilst Rajoy Battles ECB for Loans; www.theleader.info 19.06.2012
[7] Der Traum vom neuen Europa; www.spiegel.de 12.06.2012
[8] Germany Signals Crisis Shift; online.wsj.com 03.06.2012
[9] German Rectitude Has Its Risks; www.nytimes.com 15.06.2012
[10] see also Die deutsche Transferunion
[11] Schlechte Stimmung in deutscher Industrie; www.ftd.de 21.06.2012