Desperately seeking Angela
Keep Germany happy is the order of the day in the euro zone. France’s president Nicolas Sarkozy has agreed with Berlin’s demands that tougher rules be enshrined in EU treaties. The European Commission’s proposals for common euro bonds are bowing to German insistence on fiscal discipline. And the EU executive is already launching the legislative process to implement stricter fiscal surveillance rules recently agreed by the monetary union’s leaders. So if all goes according to plan, the euro zone will not see another debt crisis ever again.
That leaves the not-so-minor question of how to get out of the current one. Yields on euro zone’s remaining triple-A rated members’ bonds are rising, and even a German bund auction on Nov. 23 seemed hit by the current climate. Germany’s partners clearly think the solution to the crisis will come from Berlin – and what it will offer in exchange for their firm commitments never to sin again.
The hope is clearly that Angela Merkel will prove more flexible in the short term in exchange for getting her say in the longer term. She could tone down her government’s opposition to a larger role for the European Central Bank. That will not end the Bundesbank’s principled hostility to ECB bond-buying. Nor will it prompt Mario Draghi to move just because governments tell him to. But at least it would lift the most serious political obstacle to a more active central bank role. Merkel could also pay more attention to demands – or, rather, polite suggestions? – that surplus-prone Germany do more to shore up the entire region’s economy.
The German chancellor knows she must act fast, if only for self-interested reasons. She will stand for reelection in 2013. Current forecasts see the euro zone economy barely growing in 2012. But a recession will be hard to avoid if Spanish, Italian and even French government bond yields stay at their current levels for long. At some point Merkel will have to admit, for the sake of her own political future, that long-term promises aren’t enough to convince investors that their euro-panic is unfounded.