Observers weren’t expecting much from the mini-summit Thursday in Strasbourg, France, where French President Nicolas Sarkozy, German Chancellor Angela Merkel, and Italian leader Mario Monti met to discuss Europe’s dire debt crisis. Such lowered expectations proved well-founded. Because even as the situation threatening the euro’s very existence continued, the trio representing the currency’s three largest economies announced no new action to quell the storm facing them. Just as bad, they said they don’t even expect to have any new collective proposals until at least next month.
“The goal of today’s meeting wasn’t to come to agreement on modifying (euro zone) treaties,” Sarkozy said during a post-summit press conference, noting the talks were part of on-going consultations to resolve the euro crisis ahead of another meeting in Brussels Dec. 9. “We advanced discussions of collective proposals.”
Yet even as Sarkozy kept faint hope alive that the threesome may soon forge collective responses to deal with the underlying causes of the current situation, it became clear that action almost certainly won’t involve what many experts view as a potential game-changer: the adoption of France’s position that the European Central Bank (ECB) be given a far greater role in responding to the crisis—including its pledge back all euro zone debt. Indeed, despite Sarkozy’s hints about ECB action, Merkel weighed in immediately after her host to douse the very idea with cold water.
“The European Central Bank is independent, and modifications of (euro zone) treaties won’t involve the ECB,” Merkel stressed, noting changes currently under discussion are instead aimed at tightening deficit and debt rules, and their strict centralized enforcement. “The focus is on coordinated fiscal policy. It will not have anything to do with the ECB.”
But despite that sound of what seemed to be the German door slamming on the desire of Paris—and wish of many independent economists—to allow the ECB to act as the guarantor of all euro zone debt, that potential exit from the crisis may not be completely barred. Indeed, speculation among pundits is rife that Thursday’s post-summit press conference involved a careful balancing act by all three leaders to defend national interests without fatally compromising the euro’s future with new signs of clashes. For Sarkozy, that involved stressing general agreement within the trio about what will need to be done to save the euro, and using vague language that might suggest that Paris’ ideas about a more active ECB may still be one of the unspecified aspects of talks.
Reflecting Germany’s staunch opposition to surrendering the ECB’s independent role as a guardian against inflation—and its hostility to euro zone debt being pooled in a way that would leave sturdier nations vulnerable to the ills of weaker ones—Merkel repeatedly dismissed the monumental changes markets are waiting for a non-starters. But given the risk of seeing the euro itself imploding amid growing investor speculation, many observers think Merkel’s may be playing chicken with the ECB question. Some suspect she’s seeking to force the concessions on austerity and reform from euro partners that she’ll need to later convince fellow German conservatives in to accept modification of ECB statutes as a means of saving the single currency from attacks by spooked markets.
Monti, for his part, looked intent on signaling Italy’s return to the forefront of European leadership following the ouster of discredited premier Silvio Berlusconi. Yet in repositioning himself and Italy within the euro zone vanguard three, Monti may also be hoping to stake out the role of arbiter and deal-maker in whatever moves the trio hammer out as the crisis evolves.
Why suspect such brinksmanship and jockeying as the future of the euro grows more doubtful daily? Because as the debt crisis progresses, the balance of power among members appears to be shifting too. The economic health of Germany had allowed Merkel to assume the role of leader and order-giver–shaping bailout conditions, and imposing reforms on sickly partners till now. Not only did that force floundering states like Greece and Italy into accepting strict German remedies, but it also produced unusual docility and submission by Paris. That may now be changing.
Much in the way market fears shifted to France earlier this month ahead of the crisis—driving French borrowing costs up dangerously in the process—skepticism about the stability of German bonds has also begun to take root. On Wednesday, Berlin found few buyers for its latest bond issue for the first time ever. That concern led to nearly half of the $8 billion in new debt getting no takers, which in turn drove the interest rates demanded by those who did make bids over 2%.
With Spain and Italy battling rates of nearly 7%, the jump in prices Germany pays was hardly dramatic—but a still clear sign investors view Germany’s economic well being and future as inextricably tied to the euro, and its debt-heavy partners. Meanwhile, Merkel and her German backers find themselves increasingly at odds with other euro members over the idea of creating euro bonds for all (or at very least, new) debt issued within the crisis. On Wednesday, Merkel sparred with European Union officials on the desirability of euro bonds. Still, despite her reiterated rejection Thursday of euro bonds and the ECB’s role being enlarged, some commentators think Merkel may secretly be using intransigence to gain as much protection for Germany vis-à-vis its sickly euro partners before embracing the hated but inevitable unleashing of the European Central Bank. .
“Germany got every concession and demand it has made in the crisis, and there really isn’t a great deal more it can attain by refusing to budge on the ECB,” French economist Eric Heyer said on French TV news channel TF1 Thursday. “We’re aware of Germany’s position on the central bank. We understand its enduring trauma over inflation in the 1930s, and its insistence the ECB stay focused on inflation risks. We sympathize with German hostility to making itself vulnerable to the financial and debt excesses of its partners through mutualization. But it’s becoming rather apparent that Germany is going to have to give on all those issues—especially on the ECB’s role. The option is it faces what would be the far worse economic, financial and political disaster of the euro exploding—and assume a large part of the responsibility if that were to happen.”