This was the first European summit that ever closed in order to open another one – Wednesday, 26 October. In the days between the two summits, Angela Merkel had to sell the euro bailout package to the Bundestag at home – while Italy had to write its letter of intent. Germany’s position prevailed in all of the crucial issues on the agenda at the Brussels summits: private investors took a 50% cut in the face value of their Greek bonds; the ESFS’s firepower was boosted through a risk insurance mechanism. While some elements of this package, which includes bank recapitalization, will be put to the test, the German recipe won over the French one.
This seems to be the only possible Europe – a Europe that depends on the domestic political situation in Germany, the country which lies at its heart and which is economically the strongest, but whose hands are tied by its own parliament whenever Europe is involved.
In the German Europe that the debt crisis is beginning to spawn, France only appears to be an “equal” partner. In actual fact, Berlin carries too much weight and Paris too little for an effective directorate to be possible. The others are playing a minor role (the northern countries), they are crippled by debt (the Mediterranean countries), they have opted to keep out of the whole business (the United Kingdom), or they have decided to wait and see (Poland). German Europe is being born “by default,” in the real sense of the term – not so much through the partial default of a peripheral country such as Greece, but through the political evaporation of a series of other traditional players in the European game, including Italy. On the “Frankfurt Committee” that has taken the place of the old group of six founding members, the Community institutions sit alongside Merkozy (Merkel- Sarkozy), the unbalanced couple. But the Brussels Commission is starting to look more like a technical secretariat than the Union’s potential government; the European Council reflects the existence of this hierarchy, which the future Mr. Euro will not be able to ignore; and the ECB (European Central Bank) is caught in an ambiguous position. The Frankfurt bank has intervened to stanch the debt crisis, but it cannot take on the “final lender’s” role that those who believe in fiscal union would like to see it play.
This (admittedly rather crude) picture of the balance of forces does not do away with the basic point, namely that the Monetary Union will be able to overcome the present crisis: only if the countries at its head today, with Germany at the top of the list, raise their solidarity index (which is too low even according to a German “grand old man” of Helmut Schmidt’s caliber); and only if the indebted countries raise their credibility index (with reforms) and their budget discipline. In this connection, the dual summit has marked potential progress, on paper at least: the balance between solidarity and discipline on which the Monetary Union rests is beginning to make more sense again.
Are the decisions taken enough to reassure the markets? The honest answer to that question is: only in part and only for a while. A structural solution would require a great deal more. It would probably require a quantum leap toward fiscal coordination, in which the issue of European bonds (the famous eurobonds) would be the first step. The reality of the situation, on the other hand, is that the political conditions for a development of that kind do not yet exist. On the contrary, there is a major degree of mutual mistrust, as shown by the unpleasant climate at the meetings in Brussels. For now, having proved incapable of coming up with decisive answers in their own home, the Europeans are seeking remedies elsewhere, including fresh credit from wealthy countries with financial reserves such as China and the Gulf Emirates. Such a solution comes at a political price for the EU (about which not a great deal has been aired), but that price is clearly felt to be inferior to the economic burden of a totally intra-European solution.
Some people, noting Germany’s hesitation in recent months, think that the country has a “plan B” up its sleeve; in other words, that it is planning to set up a “small” northern European community purged of the Mediterranean debts. This is a widely held view but it is not convincing. While it is true that a part of the German elite has always nurtured an idea of that kind (even back in the 1990s before the single currency was introduced), it is also true that the cost of a split in the euro would far outweigh the benefits even for Germany itself, and Angela Merkel is aware of that. Her plan is not to break up the eurozone, it is to rebuild it on German terms. That, in a nutshell, means: without excessive burdens for her taxpayers; and enforcing more stringent rules on indebted countries, with automatic sanctions and with new powers for intervening in domestic policy. The erosion of national sovereignty in budgetary affairs is becoming one of the consequences of the sovereign debt crisis, as Italy found out in Brussels yesterday. It means that failure to implement reforms, in today’s Europe, carries a rising political price tag, not just an economic one.
Germany’s “plan A” is to bind this “German-style” Europe to a further reform of the treaties. In view of the precedents and in light of today’s urgency, the mere notion of such a thing may seem absurd, yet it reflects fairly effectively not only Berlin’s domestic and constitutional constraints, but also the conclusion that Angela Merkel has drawn from the crisis in Greece and its soulmates: More stringent and far more binding ground rules are needed to prevent the Monetary Union from lurching from crisis to crisis. We may agree with that, but if the price for healing the debt is going to be a decade of austerity, then German-style Europe is likely to prove unsustainable over time.
If the European Union survives a financial crisis, which is akin to a latter-day war, then it is going to emerge looking very different, and possibly with its own “peace treaty”. In theory, the result will be a multilevel Europe with an inner core based on the euro and on institutions partly separate from those of the 27-strong EU. The outer circle will comprise those countries that are in the single market but that do not subscribe to the single currency. A euro-based “inner core” may even provide the federalists with an opportunity. But a different vision might argue that there is a danger that the creation of a Union of that kind (so heavily differentiated internally) may end up damaging the single market, thus undermining one of the European economy’s strong points. This is an important debate for the Old World’s future – it is just a shame that, after being one of Europe’s founding members in the last century, Italy seems today to have become more of an object in the hands of the Europe that is beginning to take shape.