InvestSMART
The Intelligent Investor Growth Fund is listing on the ASX. Initial Offer closes Friday.

World waits on Merkel, but can she muster support?

AS EUROPE struggles to reverse a plunge in financial confidence, the world waits for German Chancellor Angela Merkel to make a fundamental choice.

AS EUROPE struggles to reverse a plunge in financial confidence, the world waits for German Chancellor Angela Merkel to make a fundamental choice.

She, more than any European politician, will have to either summon the leadership to rescue the euro or concede that the political will is not there.

Merkel, 57, faces far-reaching decisions about how to deal definitively with the debt crisis in Europe and, more immediately, whether to allow Greece to default or even to leave the currency union. US officials fear that if she does not act more decisively, bank lending could freeze up and the result would be another sharp financial downturn on both sides of the Atlantic.

Fears of a worsening debt crisis slammed European stocks, especially shares in French banks, forcing the French government to declare its support for its three largest financial institutions. The turmoil added to worries that the Greek crisis would prove difficult to contain without more robust action from Germany and, ultimately, its taxpayers.

The project of European integration, which began in the difficult years after World War II, is also on the line. If Greece were forced to abandon the euro, as more and more voices on the German right are demanding, it would be a jarring setback for solidarity on the Continent.

Critics say Merkel has focused too much on protecting her political standing inside Germany, placing her position as chancellor above the need for bold, risk-taking leadership to rescue the euro zone. But that would mean sinking more German money into an ever-deepening economic union that voters have shown antipathy for.

Her governing coalition is splintering over the Greece bailout, and her party, the Christian Democratic Union, has suffered setbacks in state elections.

The resignation on Friday of Juergen Stark, a German member of the executive board of the European Central Bank and the second significant German figure at the bank to leave its governing council this year, offered a window into the intensity of German opposition to the steps Germany and the central bank have already taken in bailing out the weaker southern nations.

"The chasm between what is needed in terms of economic policy and what is possible in terms of domestic politics and party politics has widened," said Cornelius Adebahr, a Europe expert at the German Council on Foreign Relations in Berlin.

Events appear to be forcing Merkel to tip her hand.

With the latest market assault this week on French financial institutions, the spillover from the debt crisis has now reached the German border. With first Italy and now France affected, problems once dismissed as confined to the distant periphery of Greece and Portugal have arrived at the core of Europe, and with them unavoidable questions about the continent's future.

President Nicolas Sarkozy of France, her antic foil, hopes to draw Merkel into deeper commitments to an economic government for the currency zone, once again making France and Germany the motor of European integration that the two countries have been since their reconciliation after World War II. And if France's struggles are not enough to prod Germany and its phlegmatic leader to take bold action, analysts say, it is likely nothing will.

The prolonged state of confusion and uncertainty may be as bad or even worse than the underlying problems themselves.

"If they would agree on a specific solution, say to the default of Greece, I would see a relatively low likelihood that the euro zone would also default or be destroyed," said Michael Schroeder, head of the research department of international finance at the Centre for European Economic Research in Mannheim, Germany. "What's really a danger is this chaos which we have at the moment."

France, as a presidential republic with a majority party in Parliament, has fewer domestic political problems than Germany, with its federal system and negotiated coalitions. But Sarkozy knows that he cannot move without Germany. Much as the two leaders do not like each other and have radically different personalities, Sarkozy has sought to ensure that France and Germany move as one.

Much hinges on getting all 17 nations in the euro zone to ratify the decisions of July 21, as the French Parliament has done, which includes an increase in the bailout fund and an expansion of its powers. Those decisions would already mark a shift in Germany's harder-line positions on the euro.

Dedicated supporters of the European project agitate for a centralised fiscal union, more like the US, to replace Europe's current hybrid structure, in which member countries use a common currency even as they determine spending and debt levels on their own. But it is no longer clear if Merkel can even muster the votes to pass the Greek bailout deal reached in July, much less win backing for bold new steps.


Join the Conversation...

There are comments posted so far.

If you'd like to join this conversation, please login or sign up here

Related Articles