Euro-Zone Debt to be Communitized

Chancellor Merkel does not have many allies in the euro crisis.

Chancellor Angela Merkel is taking a hard line on the euro crisis this week, insisting that shared debt be avoided at all costs. Her shrill tone, however, is born out of fear. Just as Europe finds itself on the verge of historic reforms, Berlin is losing control of the debate. Idealism, and the euro, might be the victims.

The Thursday political cartoon in the Financial Times Deutschland couldn’t be easier to decipher. It depicts the Grim Reaper standing over an aged, bed-ridden Angela Merkel saying: “It is time.” Merkel responds: “For euro bonds, I know.”

The drawing refers to the chancellor’s comments made Tuesday afternoon during a meeting with parliamentarians belonging to her junior coalition partner, the Free Democrats. Euro bonds, she said according to meeting participants, would not be introduced in the euro zone “as long as I live.” The statement was widely interpreted as Merkel finally losing patience with demands from southern European countries that euro-zone debt be communitized. Instead of bending to the political breeze, Merkel had finally turned into “Iron Angie.”

But is that really what she meant? There are several indications that the answer could be no. First and foremost, the Chancellery has been at pains since Tuesday evening to elaborate on the context within which the “as long as I live” sentence was uttered. In reality, several papers, citing Chancellery sources, are reporting on Thursday that she was outlining the complexity of the reforms necessary before such shared debt could be introduced. As such, euro bonds aren’t likely “in her lifetime.” In other words, the Chancellery is insisting, Merkel remains the voice of calm and reason rather than one of hysteria and division.

Furthermore, in her speech before German parliament on Wednesday, her line on euro bonds was the same as it has always been — shared debt might make an appearance eventually, but only at the end of a long political and fiscal reform process.

Hijacking the Debate

Still, something has changed in the Chancellery. Merkel’s message has becomeshriller and more urgent as demands from Southern Europe for shared debt have become louder. The reason is not difficult to divine: From Merkel’s perspective, the narrative of impending disaster threatens to hijack the debate.

Spain and Italy, in particular, are demanding to know what European leaders are going to do to provide immediate financial market relief. Both countries are struggling under extremely high and rising borrowing costs and it seems unlikely that the euro zone can afford to bail both countries out should the need arise. They believe an existential crisis is emerging. Some see salvation in euro bonds. Others see a solution in shorter period euro bills or a common debt repayment fund and some in all of the above.

For the German chancellor, however, that discussion is akin to putting a very explosive cart before the horse. Instead, she wants to talk about tightening budget oversight. About a banking union. About further EU political integration. About a transfer of national sovereignty to Brussels. Merkel wants nothing less than a complete overhaul of the European Union — including far-reaching changes to EU treaties and, likely, to national constitutions — and she wants to start at the summit on Thursday. Only then, she has said repeatedly, can the idea of shared debt be addressed.

In short, she and other European leaders are talking past one another — and the euro could ultimately fall victim to the disconnect.

Merkel’s conviction that only fundamental reform efforts — concrete steps toward the political union which the original architects of the common currency failed to put in place — can save the euro in the long run informed her Wednesday assault against the plan presented earlier this week by the so-called Gang of Four. European Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso, Euro Group President Jean-Claude Juncker and European Central Bank President Mario Draghi worked out a possible plan to pull the euro back from the brink.

Dark Realism of the Moment

Still, it would appear that history is suddenly on Merkel’s side. Reaching an agreement on creating a Europe-wide banking union alone would represent a huge step toward the integration that the Chancellery believes is vital for the long-term survival of the euro.

Europe, of course, would never have gotten this far without the narrative of disaster. Avoiding the abyss has always provided the necessary motivation. Now that Merkel sees the real possibility of concrete steps toward political union, however, she wants to turn down the volume on despair and refocus on idealism.

Monti refuses to cooperate. Without immediate measures to bring down borrowing costs, the crisis could unleash “political forces which say ‘let European integration, let the euro, let this or that large country go to hell,’ which would be a disaster for the whole of the European Union.”

It is this clash, between long-term vision and short-term fear, that will shape this week’s summit. Whether Merkel’s idealism has the power to overcome the dark realism of the moment remains to be seen.


Spiegel has the full article

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