Audacious Angela's plan to save the euro

In the lead up to the election, Chancellor Angela Merkel knows that Germany's prosperity and security rests on sustaining the euro. Eurobonds will be unlikely, but Berlin may acquiesce to loose monetary policy.

So might miserly Merkel play the last act as audacious Angela? The rest of Europe dearly hopes so. I cannot recall the last time a German election had the rest of us on the edge of our seats. But then this month’s poll is as much about the future of Europe as it is about the condition of Germany.

The suspense does not hang on polling day. The universal assumption — I suppose it could be wrong? — is that whatever the precise disposition of political forces when the votes are counted on September 22, Merkel will secure a third term as chancellor. And would a grand coalition of her Christian Democrats with the opposition Social Democrats veer off in a direction markedly different from that of the present pact with Free Democrats? Probably not.

By all accounts, Ms Merkel has decided that a third term would be her last. She wants to avoid the mistake of her mentor Helmut Kohl  —staying too long. Some think she could depart before the end of the term. We Brits remember how Margaret Thatcher was slightly mad by the time she went. Whether circumstance allows Merkel to bow out early is another question.

The resolutely parochial nature of the election campaign has fitted Germany’s mood. Save for selling lots of things to China, the country feels much better looking inward than outward. The euro crisis that has so long dominated European politics has flared only briefly on the campaign trail. The eurosceptic Alternative for Germany party, or AfD, could spring a surprise by crossing the 5 per cent threshold for seats in the Bundestag. Most polls suggest not. In any event, a full two-thirds of Germans have concluded they are safe with Merkel.

For all that, the fate of the euro and the EU will draw the contours of a third term and settle the chancellor’s place in history. The immediate threat to the single currency has passed. But decisions taken mostly (though not entirely) by Germany during the coming years will determine whether the euro can be put on a sound footing. History may yet record Merkel as the leader who presided over the collapse of a unique experiment in European integration, or as the German chancellor who steered a badly-leaking ship into safe harbour.

I struggle to make up my mind about Merkel. Like many, I have been sharply critical of her one-minute-to-midnight approach to decision making during the euro crisis which, apart from raising the blood pressure of leaders as distant as Washington and Beijing, has increased the cost of stabilising the single currency. Yet there is also a nagging admiration. Unflappability is a rare commodity in modern politics. So is careful deliberation.

The case for the prosecution is easily made, even if one discounts the more hysterical charges laid against the chancellor in some of the eurozone’s southern states. Germany’s economic power carries responsibilities within and beyond Europe. Forcing unparalleled austerity on her partners at the price of depression and record unemployment is not the way to build a cohesive European Union. The burden of economic adjustment must fall on creditors as well as debtors. Leadership requires a willingness to mould public opinion rather than be caught in its thrall.

Expecting US President Barack Obama to make hard choices to uphold order in the Middle East while allowing Germany to disavow any complicity is not a foreign policy fit for Europe’s pre-eminent power. Protecting feckless German banks while punishing debtors in Spain, Portugal or Ireland scarcely speaks to solidarity. The chancellor’s critics can produce a long list.

There is, however, another possible narrative. This says that Merkel understands there is more to leadership than vaulting rhetoric; look at how much trouble Mr Obama has got himself into. Effectiveness is about marrying the desirable with the possible; expanding the boundaries but also carrying popular support. Merkel, in this guise, knows Germany is best led from behind.

The reality is that Germany has moved since the crisis erupted. Three or four years ago it was impossible to imagine that it would support a €500 billion ($A717.44 billion) bailout fund in the form of the European Stability Mechanism; that it would sign up to two rescue deals for Greece and be ready, once the polls have closed, to contemplate a third; and that the chancellor would defy the sacred Bundesbank to support an open-ended commitment to the debtors from the European Central Bank. The future of the euro rests with German consent. The voters have been led, but almost without realising it.

There is one more thing. Merkel’s judgment that the euro can flourish in the long term only if weaker economies undertake the reforms needed to restore national competitiveness is essentially right. Solidity in return for solidarity is not a bad slogan.

For the future, two things are clear. The first is that the eurozone nations are not going to build the federal Europe deemed vital by those with overly tidy minds. The pace of integration should quicken, particularly in areas such as banking union, but Europe’s single currency will remain — like the EU itself — a hybrid: a monetary union with both collective rules and national decision-making. The second is that getting there will not be a smooth process. There are plenty of squalls ahead.

Merkel’s settled view is that Germany’s prosperity and security rest on sustaining the euro. There will be no grand gestures, but she will do what is necessary. Forget eurobonds, but think of German acquiescence in loose monetary policy. Watch Berlin ease up on the deficits of those states that prove themselves serious about structural reform.

Is there such a thing, I sometimes wonder, as stealthy — even miserly — audacity?

Copyright the Financial Times 2013

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