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Analysis: Merkel’s opposition to a powerful euro zone solution, explained.
BERLIN, Germany — Over the past twenty-four hours, both French President Nicolas Sarkozy and German Chancellor Angela Merkel have delivered landmark speeches advocating deep changes to the euro zone to address the debt crisis. The changes, if agreed to by member nations, would impose real fiscal discipline over nations, with the goal of giving Brussels the power to prevent countries from falling into fiscal trouble.
The approach is a risky one. It asks countries to sacrifice national sovereignty in the name of economic stability, but in recent years citizens have signalled an unwillingness to forfeit more control to Brussels. But an even bigger problem is that it's a long term approach to an urgent problem. If successful, it may prevent countries like Greece and Italy from ammassing huge debt burdens in the future. But it won't solve the continent's current crisis.
European nations need huge loans, and they need them fast or they risk defaulting. With the debt conflagration now blazing across borders, Merkel and Sarkozy are essentially gazing off at the horizon as the world urges Europe to deploy its most powerful option: unleashing its central bank to act as a lender of last resort.
Breaking news: Merkel announces Europe-wide "fiscal union."
The problem: Germany is resolutely opposed to using the ECB in this way. Merkel, appeared to reiterate her objections today, stating that "The European crisis will not be solved in one fell swoop."
The stakes could hardly be higher. Forget about tiny Greece, Portugal and Ireland. Italy, the zone’s third largest economy, owes $2.55 trillion. It will have to refinance a staggering $530 billion in 2012 alone, and investors have been demanding unsustainable rates, in excess of 7 percent. Meanwhile, France’s interest rates are rising, and ratings agencies are threatening its AAA status. Even Germany itself — the continent’s economic powerhouse — may not be immune from investor’s aversion, as a recent weak bond auction showed.
Altering Europe's treaties won't change this. Instead, fear is mounting that Europe’s debt crisis is raging out of control, and could ultimately cause the breakup of the currency union or worse.
The most surefire solution would be for the ECB to step in, expanding its balance sheet to cover loans that private investors shun. That option would require a change in the bank’s charter, but it wouldn’t even demand taxpayer cash, given that the central bank can simply print money.
In a dramatic speech earlier this week, Polish Foreign Minister Radosław Sikorski virtually implored Chancellor Angela Merkel to act. “I fear German power less than I am beginning to fear German inactivity,” he said in Berlin on Monday. “You have become Europe’s indispensable nation. You must not fail to lead.”
A New York Times editorial characterized Germany’s stubborness more succinctly, calling it “absurd.”
Despite this rising chorus of pleas, Germany still says “nein” to using the ECB — a point that Merkel reiterated in her speech on Friday. (The country has also repeated rejected another powerful option, of issuing euro bonds that would pool the zone’s credit rating, reducing costs for the highly-indebted nations that are straining the continent, but increasing the cost for more fiscally-disciplined countries; there some softening on this issue in Merkel's speech Friday, however.)
So is Germany’s refusal really absurd, as The Times suggests? What exactly are its leaders thinking?
Analysts say that firing up the ECB’s printing presses to solve the crisis is something that goes deeply against the grain here.
Some experts say Chancellor Angela Merkel is simply playing hardball, holding out on the issues of the ECB and eurobonds in exchange for concessions.
“Mrs. Merkel’s position has been to use the pressure that is exerted by the markets to help push countries that have budget or generally public finance problems towards a much stronger reform drive,” said Timo Klein, senior economist with IHS Global Insight. He adds that she is using that same pressure to try to make changes in the EU treaties to allow for greater budget supervision. “Obviously this is a high risk strategy,” he adds.
But Berlin also disagrees with its foreign detractors regarding the wisdom of using the ECB as a lender of last resort. “If this were to be seen as a