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Merkel'sMomentofTruth
NationalJournal,December1,2011
Byline:BruceStokes
BERLINThesymbolismwasperfect,eventhoughitwaspurelyaccidental.Thesetting:theGerman
FinanceMinistry,adullgrayedificeonWilhelmstrassethatonceservedasLuftwaffechiefHermann
Goering'sheadquarters.Thescene:adiscussionwithtwoFinanceMinistryofficials.Thebackdrop:a
tallwindowthatframedaGreekflagatopthatnation'sneighboringconsulate,flutteringinthedistance
againstacrispblueNovembersky.TheeurocrisiswhichstartedinGreecein2010,spreadtoIreland,
Portugal,andSpain,andnowthreatenstoengulfItalyseemstoloomovernearlyalldiscussionshere
thesedaysamongofficials,pundits,andbusinessleaders.
Earlyinthecrisis,theGermansevinceddenial.Latercamefrustration.Nowtheytelegraphagrim
resignationabouttheeconomicchallengesahead,includingthepossiblebreakupofthe17nation
eurozone.Yet,forthefirsttime,theyarealsohopefulthatGermany,facingthedemiseofthecommon
currencythatBerlinwasinstrumentalincreating,isfinallyreadytoshowmoreleadership.
GermanChancellorAngelaMerkelhashadanepiphany,herclosepoliticaladviserssay.Merkel's
hesitantapproachinthebeginningoftheeurocrisishadinvolvedthebareminimumneededtoavoida
meltdown,outoffearthatanythingmorewouldangertheGermantaxpayersfootingthebill.Buther
lateOctoberconfrontationswithGreeceandItalyrejectingGreekplanstoputeconomicreformstoa
referendum,forcingtheItalianprimeministertoresignwhensherealizedthatfurtherditheringrisked
catastrophehavestiffenedthechancellor'sspine."Sheisdeterminedthatshewillnotbethe
chancellorwhopresidesoverthedeathoftheeuro,"saidElmarBrok,amemberoftheEuropean
ParliamentfromMerkel'sChristianDemocraticParty.PhilippRoesler,vicechancellorofGermanyand
chairmanoftheFreeDemocraticParty,agrees."Youwillgetmoreclarity"onMerkel'svision,hesaid.
"Thefederalgovernmentisgoingtodoeverythingitcantohangontotheeuroandtokeepitstable."
Germanvotersapprove,andMerkel'spopularityhasrebounded.Thatimprovementwillgiveherroom
toadvanceamoreassertive,forwardleaningGermanresponsetoEurope'sfinancialproblems,
Merkel'sconfidantssay.Andwhilefinancialmarketsmaynotyetbeimpressed(thecostofborrowing
continuestoriseincrisisplaguedcountries),Merkel'snewfoundfortitudecouldbegoodnewsforthe
Obamaadministration.Germanpassivityinthefaceofturmoilthatthreatenstoundermineboththe
U.S.economicrecoveryandthepresident'sreelectionbidhasincreasinglyfrustratedtheWhiteHouse.
ThefirsttestofMerkel'sresolvetopullEuropeoutofitsdownwardspiralwillcomeatasummitofE.U.
leadersinBrusselsnextweek.Thechancellorhassignaledthatshewillpushforcloserpoliticalunion
inEuropetogiveEuropeafinanceministerandcentralizedbudgetaryoversightandforchangesin
Europe'sgoverningtreaty(oragreementamonglikemindednations)thatwouldautomaticallytrigger
toughsanctionsonprofligategovernments.AllofthisisintendedtomakeBrussels,notBerlin,the
enforcerandthustheboogeyman.
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Troubleis,Merkelmaybemissingthepoint.Thechancellorisattemptingtonaildownlongtermreform
inindebtedcountriesbeforeacquiescingtoshorttermreliefmeasures.Instrategicterms,thismakes
sense.
Butsheisplayingahighstakespokergame,andshedoesnotholdallthecards.Financialmarket
playersareuppingtheantedaily:TheywanttheEuropeanCentralBanktoactastheeurozone's
lenderoflastresort,buyinggovernmentdebttoholddownborrowingcosts.Theywanttheeuro
membernationstoraisemoneybyissuingeurobondsbackedbyallgovernments,mostnotably
Germany(withitsAAAbondrating),toreassurebuyersthattheywillbesafe.Andtheywantatleasta
$1.3trillionbailoutfundforcountriesatriskofdefaultingontheirdebts.IfMerkeldoesnothavethese
threeacesuphersleeve,sheriskslosingtheentirepot:theeuro,economicgrowthinEuropefora
decade,theContinent'sprominenceinworldaffairs,andherownlegacy.
EventsareabouttotestMerkel'sgambleandtheGermanpublic'swillingnesstopropupthe
Europeaneconomy.ThenextturnintheunfoldingcrisismaycomebeforeChristmas.Abankrun
looms,asinternationalmoneymanagersreducetheirexposurebeforeclosingtheirbooksattheendof
thecalendaryear,drivingborrowingcostsforItalyabove7percentclearlyanunsustainablelevel.
RomemayhavenoalternativebuttoturntotheInternationalMonetaryFundforseveralhundred
billiondollarsinassistanceasearlyasJanuary,observersherespeculate.TheIMFwillnothelpunless
EuropeandespeciallyGermanyparticipatesinanynewbailout.
SoasthefinancialcontagionspreadsacrossEurope,threateningtoinfecttheUnitedStates,Merkel's
teamsaysthatshehasgottenserious.Thequestionis,seriousenough?
HOWITPLAYED
TheGermangovernment'sresponsetothecrisishasbeenwidelycriticizedasadaylateandaeuro
short.Inthespringof2010,BerlindraggeditsfeetbeforeconsentingtoaminorGreekbailoutthat
carriedanunsustainableinterestrate.Atthesametime,itreluctantlyagreedtothecreationofa$600
billioneurozonebailoutfundwithsomanyrestrictionsthatitsfirepowerwasmuchlessthanintended.
Throughoutthecrisis,GermanyinitiallyresistedEuropeanCentralBankinitiativestoreducefinancial
marketvolatilityandincreaseliquidity."Theyarealwaysbehindthecurve,"complainedHenrik
Enderlein,associatedeanattheHertieSchoolofGovernanceinBerlin.
ButMerkel'scautionhasbeentheproductofpoliticalcalculus,notmiscalculation,saidJohnKornblum,
aformerU.S.ambassadortoGermanyandnowaninternationalbusinessconsultanthere."Theyhave
hadaverysimplestrategy:'Wecan'tgetwayaheadofourpublic,ourpolitics,orourcourtsunless
thereisacrisis,'"henoted.OneofMerkel'scloseeconomicadvisersexplainedherstyleas,"Don't
takebigrisks.Gostepbystep.Thatishowyoutakepeoplewithyou."
That'salsohowMerkelhasmaintainedpressureonGreeceandotherindebtedEuropeannationsto
leveragereformsthattheyhavelongresisted.TheviewfromBerlinisthatifGermanyandothershad
simplywrittenbigcheckstocoverPortugueseorSpanishshortfalls,thosegovernmentswouldnothave
cutpublicspending,raisedtheretirementage,ortakentheothermeasuresneededtogettheirdebts
undercontrol.
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Tohercredit,Merkel'sincrementalcourseseemstobeworking.ShehasmovedtheGermandebate
overtheproperresponsetotheeurocrisisfromBundestagoppositiononbailouts18monthsagoto
supportinsidethatbodytoday."Shehasforcedpeopletogothrougharealitycheck,andshehas
prettymuchwontheday,"saidThomasMayer,DeutscheBank'schiefeconomist.
Thatresulthashelpedherwiththepublic,too.Afteraprolongeddeclineinpopularityearlierthisyear,
markedbyelectoralsetbacksforMerkel'sChristianDemocraticPartyinseveralstateelections,things
haveturnedaround.InearlyOctober,only45percentoftheGermanpublicapprovedofhereuro
crisismanagement,accordingtotheGermantelevisionbroadcasterZDF.InNovember,63percent
approved.
ButMerkel'scriticsanoddmixofliberalandconservativeeconomistsandthetabloidpresssaythat
GermanyandEuropehavepaidastiffpriceforhertactics."Populardiscontenthasrisenintra
EuropeanCommunitytensionhasgrown,"saidGerhardSchick,aGreenPartymemberoftheGerman
Bundestag."Debtlevelshaverisen,andthefinancialsectorislessstable.Sowehavelosttwoyears."
ReinhardSchlinkert,managingdirectorofInfratestdimap,oneofthemostrespectedGermanpolling
groups,pointsoutthatamajorityofGermansdon'tunderstandwhat'shappening.
Thechancellor'shandlingofthecrisishasfrustratedGermanvoters,whoresentwhattheyseeas
Berlin'screepingrescueofEurope."Thereisagrowinggapbetweeneliteperceptionsandvoter
perceptions,"saidChristianSchuette,thecommentaryeditorfortheFinancialTimesDeutschland.
"Andthereisagrowingimpressionthattheelitedoesnotknowwhatitisdoing."
Merkel'scriticssaythatherincrementalapproachtocrisismanagementlacksprincipleaharshrebuke
inthemoralisticdiscourseofGermanpolitics.Theycomplainthatthechancellorhasdrawnnumerous
linesinthesandoverthelastyearandahalf,onlytocrosseveryoneofthem."Ifyouhavesomeone
sayingnoandthenfinallysayingyes,"observedEnderleinoftheHertieSchool,"youdon'thave
credibility."
FurthercomplicatingMerkel'sneedtorallypublicsupportforbolderinitiatives,theshoppersonBerlin's
fashionableFriedrichstrasseorthelunchcrowdatpopularCafeEinsteinonUnterdenLindenshowno
concernabouttheeconomy.MorethanhalfofGermanstellpollstersthattheeurocrisishasnot
personallyaffectedthem.Unemploymentisatitslowestlevelintwodecades."Peoplehaveafalse
senseofsecurity,"saidJoergRocholl,presidentoftheEuropeanSchoolofManagementand
TechnologyinBerlin."Theydonotrealizealltheburdensthatwillcome."
Todate,Merkelhasconfoundedtheskepticsandoutwittedhercritics.Shehasheldtogetherherown
partyandsecuredthelegislativesupportoftheSocialDemocratsandtheGreens,thetwomajor
oppositionparties,ifonlybecausebothdemandanevenstrongerGermanresponsetothecrisis.(The
onlymajorresistancehascomefromtheFreeDemocraticParty,whichhaslongstoodforless
governmentinvolvementintheeconomy.)
Butthingswillonlygetharder.Nextyear,Germaneconomicgrowthisexpectedtoslowto0.8percent,
downdramaticallyfrom2.9percentthisyear,accordingtotheEuropeanCommission."Merkel'sbiggest
threatisthat80percentoftheworstpartoftheeurocrisisisyettocome,"Schlinkertsaid.Peer
Steinbrueck,theformerGermanfinanceministerwhommanyexpecttoleadhisSocialDemocratic
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Partyinthe2013election,isespeciallyworried."WehavetobesensitivethatantiEuropeansentiment
couldemerge,"hewarned.
Surveydatabearoutthatconcern.Germans,morethanotherEuropeans,seethemselvesasvictims.
Seventytwopercentsaythatforcesbeyondtheircontroldeterminesuccessinlife,accordingtothe
PewGlobalAttitudessurvey.Suchviewsareontherise,andthingscouldgetuglyiftheeconomyturns
sour."Germansdonotacceptthattheycouldbeatfault,"saidSchuetteofFinancialTimes
Deutschland."Ifwehavearecession,peoplewillthinkitis[foreigners']fault,thatwewerebetrayed.
Andwecouldgoballistic."Thestakesinnavigatingtheeurozonecrisisarehigh.
WHATLEADERSHIPMEANS
Formuchofthelastyearandahalf,Merkel'scautious(seeminglyhesitant)styleraisedquestions
aboutwhethertheEastGermanbornphysicistwasuptothejobofleadingEurope'smostpowerful
nation.Evenhermentor,conservativeformerChancellorHelmutKohl,criticizedherfor"thinkingsmall."
Butinthelastfewmonths,Merkel'scriticshavebeguntohavefaith.Hergameofchickenledto
meaningfuleconomicchangesinPortugalandSpain,withreformlikelyinGreeceandItaly.Sofar,she
hasavoidedaeurozonemeltdown.
TheGermanelectoralcalendarnowgivesMerkelbreathingroomtotakemorerisks.In2011,the
chancellorfacedninemajorlocalelections,soshewasalwaysjudginganyeurozoneinitiativebyits
domesticpoliticalimpact.In2012,onlyoneGermanstateelectionisscheduled."Merkelhasawindow
ofopportunity,"theGreenParty'sSchickobserved."It'suntilthemiddleofnextyear.Afterthat,every
decisionwillbeframedbyconsiderationsforthe2013nationalelections."
Thechallengeisclear.Italy,andincreasinglySpainandFrance,areinthecrosshairsofthefinancial
markets.UnlikeGreece,theyaretoobigtofail,buttheyarealsotoobigtosave,atleastwithcurrent
policytools.
So,theoptionsarelimited.TheEuropeanCentralBankcanprintmoneytobuymorenationalbonds.
TheEuropeanFinancialStabilityFacility,theeurozone'sbailoutfund,canprovidemoremoneyfor
troubledeconomies.Andtheeurozonecountriescanraisemoneyandlowerinterestratesbyissuing
jointbonds.Thedetailsoftheseoptionsareconstantlyevolvingbecausethehalflifeofnewideasis
nowmeasuredindays,notweeks.Proposalskeepgettingshotdownforoneoftworeasons:because
offearsinBerlineitherofboostinginflationorofGermany'sbecomingwhatpeopleterm"the
paymasterofEurope."
InflationconcernsariseoutofthefactthattheU.S.FederalReserveBoardandtheBankofEngland
havebothrespondedtotheeconomicdownturnbybuyingbonds.TheEuropeanCentralBankis
prohibitedfrompurchasingnationaldebtdirectly,butithasboughtsuchbondsindirectlyinan
ineffectualattempttoholddowninterestrates.Paris,London,andWashingtonarepushingfortheECB
topurchasemoreItalianandotherbondstobringthosegovernments'borrowingcostsdownto
sustainablelevels.
Merkel,however,hasrefused,fearingthatanyincreaseinthemoneysupplybroughtonbysuchbond
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buyingwouldsparkpricehikes.(Germanofficialsharboraphobiaofhyperinflationdatingbackto
1923,whenpricesdoubledeverytwodays.)Inflationwouldalsobeseenasbreakingasolemnpromise
tovoters.In2001,whenthedeutschemarkwasexchangedfortheeuro,Berlinvowedthatthemove
wouldnotleadtorisingpricesoralossofcontroloverthecurrency.Givenanagingpopulationanda
highsavingsrate,anydebasementoftheeurowoulderodeGermanpensioners'nesteggs,sparking
voterfury."Ifitcomestochoosingbetweenstablemoneyandtheeuro,theGermanpeoplewillchoose
stablemoney,"observedDorotheaSiems,senioreconomicpolicycorrespondentforDieWelt.
Germansdonotwidelyacknowledgehowlittleinflationarypressureexiststoday.(Thecurrentrateis
just2.5percent,comparedwith3.5percentintheUnitedStates.)ButsomeGermanofficialshave
beguntopushbackagainstantiinflationaryfears."Evenifyouhavehadabadexperiencewithfloods
inthepast,youneedtousewaterifyourhouseisonfire,"formerDeputyGermanFinanceMinister
ThomasMirowtoldtheFinancialTimesDeutschland.
Onthepaymasterproblem,GermansknowtheyhavetherichesteconomyinEurope.Ifmoremoneyis
lenttoindebtedcountries,itwillhavetocomeoutofGermans'pockets.ECBboardmemberJuergen
StarkspeaksformanyGermanswhenhesays,"Beingthelenderoflastresortisnotourjob."Germans
arealsoaggrievedthattheyborethe$1.9trillioncostofGermanunificationinthe1990slargelyon
theirown.
Nevertheless,theECBisworkingonvariousplanstoincreasethepotofavailablebailoutmoneyover
Germanopposition.And,onthisissue,theSocialDemocratshavesplitwithMerkel."The[bailoutfund]
isnotbigenough,"Steinbruecksaid."YouhavetotellvotersthetruththatGermanyhastopayand
thatitisinGermany'sselfinterest."
Europe'sthirdpolicyoptionistoissueeurobonds,whichwouldbebackedbythefullfaithandcreditof
alleurozonegovernments,butwhichwouldeffectivelybebackstoppedbyBerlin,themostcreditworthy
government.Germansfearthatofferingsuchguaranteeswouldraisetheirowncostofborrowing.It
would,butevenifinterestratesdoubled,Germanswouldstillbepayinglessthantheydidin2008.
TheEuropeanCommissionhasproposedseveralbondalternatives.Onewouldreplaceallnational
governmentbondissuesintheeurozonewitheurobonds.Anotherwouldreplaceonlysomeofthem.
TheGermanCouncilofEconomicExperts,whichadvisesthegovernment,hasproposeditsownpartial
sharingofsovereigndebt.Merkelhasrejectedallsuchproposals."Thereisnowayitwillwork,"she
saidinaspeechinlateNovember,because,intheend,someonewillberesponsibleforallthatnew
debtandMerkelfearsitwouldbehertaxpayers.
TheGermanConstitutiononlycomplicatesthings.Itsintegrityisjealouslyguardedhere(another
constraininglegacyofGermany'straumaticpast).Anyeffortthatappearstorunroughshodoverthe
constitutionwouldfrightenthepublic.TheConstitutionalCourtruledrecentlythatfutureGerman
participationineurozonebailoutsmustfirstgainBundestagapproval.Moreover,thecourthas
temporarilybannedBundestageffortstostreamlinethisdecisionmakingprocess,foreshadowing
delaysinGermanrescueefforts.Theonlywaytochangethiswouldbetoamendtheconstitution."For
Merkel,"saidEnderlein,"itwouldamounttopoliticalsuicide."
So,intheshortrun,Merkelispursuingchangesintheeurozone'sfoundingtreatywhichpromisesto
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beaprotractedprocessor,barringthat,anintergovernmentalagreementamongthemajorEuropean
economies.ShewantstogiveBrusselsnewpowerstoforcebudgetarydisciplineonmember
governments.Thisismusictotheearsofherconstituents,whocraveassurancethatprofligate
governmentswillnotwasteGermancash.MorethanhalfofGermans(54percent)thinkthatthe
EuropeanUnionshouldhavegreaterauthorityovermemberstates'economicandbudgetarypolicies,
accordingtothe2011TransatlanticTrendssurveybytheGermanMarshallFundoftheUnitedStates.
BUTCANSHEDOIT?
Merkel'sresolvetosavetheeurofacesanuphillclimb,weigheddownbyGermanpublicopinion,
constitutionalconstraints,and,mostimportant,fickleandimpatientfinancialmarkets."IfItalyplaysby
therules,"Enderleinsaid,"thenthingsstabilize.ButifyougetItalywrong,thenit'satotaldisaster."
Thatrealizationhasgivenrisetodiscussionhereaboutabreakupoftheeurozone.InlateNovember,
Moody'sadviseditsclients:"Theprobabilityofmultipledefaultsbyeuroareacountriesisnolonger
negligible.Aseriesofdefaultswouldalsosignificantlyincreasethelikelihoodofoneormoremembers
notsimplydefaulting,butalsoleavingtheeuroarea."HansOlafHenkel,theformerpresidentofthe
FederationofGermanIndustries,hasproposedthatGermany,Austria,Finland,andtheNetherlands
leavetheeurozoneandcreateanewcurrency,whatsomecallanortherneuro.
TheMerkelgovernmentandtheGermanbusinessandpoliticalestablishmenthaverejectedthis
heresy."Anortherneurowouldappreciatetothemoon,"saidSteinbrueck,damagingGermanexports
andthenation'seconomichealth.ButinSchlinkert'ssurveys,46percentofGermanssaytheywish
theyhadkeptthedeutschemark.TheelectorateisdividedoverwhetherGermanyshouldholda
referendumtokeeptheeuroasthecountry'scurrency."Aseriousbreakupoftheeurowouldbethe
Armageddonscenario,"saidtheFinancialTimesDeutschland'sSchuette."ButIdon'tthinktheGerman
publicbelievestheArmageddonscenario.Andiftheydo,theyunderestimatetheconsequences."
Aftermonthsofcautiousmovesinresponsetotheeurocrisis,duringwhichshehasbeencriticizedby
someasweakandpraisedbyothersforkeepingthepressureondebtornations,Merkelisreadyto
providethekindofleadershipthatcancomeonlyfromtheGermanchancellor,insiderssay.Itwouldgo
beyondreformingtheeurozonetreaty.Closeroversightofnationalbudgets,sanctionsforrunning
deficits,andmorecentralizedfiscalpolicyarenecessarybutnotsufficientcuresforEurope'sills.The
EuropeanCentralBankneedstoactasalenderoflastresort.Europeneedsabailoutfundthatis
largeenoughtointimidatefinancialspeculators.Andindebtedcountriesneedtobeabletoraise
moneyatlowerinterestratesthroughtheissuanceofeurobonds.Althoughnoneofthiswillbepopular
inGermany,Merkelnowhasthetimeonthepoliticalcalendar,therevivedpoliticalsupport,and,
accordingtoaides,thedeterminationtodowhatisneededtosavetheeuroand,byextension,
Europe'sfuture.
Thereis,however,noevidenceyetofsuchdecisiveness.AndtimeisnotonMerkel'sside.Withthe
fateofEurope'seconomy,andthatoftheUnitedStates',hanginginthebalance,theWhiteHousecan
onlyhopeshefindsthebackbonetoact.
Theauthor,acontributingeditoratNationalJournal,isseniorfellowforeconomicsattheGerman
MarshallFundoftheUnitedStates.
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BruceStokes
FullTe xt:COPYRIGHT2011AtlanticMedia,Inc.
http://www.atlanticmedia.com/

Source Citation
Stokes,Bruce."Merkel'sMomentofTruth."NationalJournal1Dec.2011.Opposing
ViewpointsinContext.Web.12May2016.
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