Despite the strength she derives from the country she represents, German Chancellor Angel Merkel is finding herself increasingly isolated, not only within the Eurogroup, but at the heart of the EU itself. The unconditional support of Finland and Austria will not prove sufficient. Her opposition to the introduction of eurobonds is coming up against swelling support in the opposite direction, championed by new French President François Hollande. The latter is miffed, what’s more, because the German debt is being financed at negative interest rates, while other euro nations, including France and Spain, have to pay what are at times extremely high rates.
Even though it will be a long haul, Hollande has managed to get the issue of a mutualization of new debt through eurobonds onto the European agenda. Merkel and her supporters argue that a country’s risk premium is the most effective way to get governments to clean up their acts, but even the German commissioner, the Christian Democrat Günther Oettinger, has urged her not to be so stubborn.
The debate about a package of growth-stimulating measures to go with iron fiscal discipline is also taking place within Germany, where Merkel needs the support of the SPD Social Democrats and The Greens in order to pass rules relating to the latter. Now that so many European economies are stagnant or actually in recession, it is urgent to come up with a Plan B. Perhaps Merkel and Hollande will be able to reach a compromise after the June 17 date of the next Greek elections has passed, with the hope that the result clears away some of the doubts over the euro, and once France has held its legislative polls allowing the French president to know what kind of majority he has at his disposal. The EU needs Paris and Berlin to get along.
The informal dinner that the European Council held on Wednesday did not throw up any specific agreements, although it did open the door to interesting proposals for shared investments and Italian leader Mario Monti’s idea for a euro-zone guarantee on bank accounts to prevent massive withdrawals of funds. Once again, instead of resolving matters, the European leaders remained on the run with their request to Council President Herman Van Rompuy to present ideas to deepen the economic and monetary union and a calendar for their application at the formal meeting on June 28-29. In any case, this will be a useful exercise, given that the monetary union cannot simply remain as it is. It must either advance toward a genuine economic and fiscal union, including the banking sector, or it will slide backward with grave consequences for all.
To consolidate the euro, a long-term view is required in order to resolve urgent short-term problems. Spanish Prime Minister Mariano Rajoy is understandably focusing on the short term, asking publicly for the ECB to intervene in the secondary market to bring down the country’s risk premium. On Wednesday we saw Rajoy take a position close to that of Hollande after visiting the French leader. This is a pragmatic move. At this time, Hollande’s Europe is more useful to Spain than that of Merkel. No one should doubt that Spain, despite its financial weakness, can play a key bridging role between France and Germany, a position which could give Rajoy a decisive edge.