GERMANY PAYS FOR MERKEL´S MISCALCULATIONS/ THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( RECOMMENDED READING )

Germany pays for Merkel’s miscalculations

By Wolfgang Münchau

Published: Last updated: May 10 2010 20:51

This was an expensive weekend for Angela Merkel, financially and politically. For months she had basked in her image as Germany’s new Iron Chancellor – “Madame Non”, as the French press had come to call her. She enjoyed the adulation of the fiscally righteous in her own party. She fell ominously silent when anti-Greek xenophobia broke out across Germany. It was all a big bluff, a giant political miscalculation, costing the eurozone a cool €750bn.

Why did she do it? Was it just about those elections in North-Rhine Westphalia last Sunday? I think the answer is No, but the elections played a part. On February 11, when Ms Merkel signed a political agreement in support of Greece, it had seemed vaguely plausible that the main capital market test would not come until mid-May. She may have calculated that the day of reckoning could be postponed at least until that time.

Another important factor was an uncertain legal situation. Ms Merkel’s staff had impressed on her that any attempt to support Greece with loans at below market interest rates would draw the ire of the German constitutional court. That, too, turned out to be a misjudgment. We know that the court is sceptical about further European integration and made its views clear last year in its ruling on the Lisbon treaty. But Germany’s constitutional justices are not reckless. They duly and almost instantaneously dismissed a frivolous case against the Greek aid package, brought by four Europhobic professors. If Ms Merkel had acted in February, the legal situation would not have been different.

I heard that she took fright when Dominique Strauss-Kahn, the managing director of the International Monetary Fund, and Jean-Claude Trichet, president of the European Central Bank, descended on Berlin to tell her that the future of the eurozone was at stake. It was time to deliver, and she agreed. But Ms Merkel failed to prepare Germany for her U-turn, and the reaction of the country was one of confusion and bewilderment. In her speech in the Bundestag last Wednesday in support of the Greek package, the chancellor botched an opportunity to explain why it was necessary. Only at the weekend, and for the first time, did she make a passionate case that it was in Germany’s national interest to save the eurozone.

By then, her coalition was already heading for a bad defeat in North-Rhine Westphalia. As the editor-in-chief of Germany’s ZDF television remarked, Greece was an important factor in the elections – but less the actual decision to support Greece than Ms Merkel’s prevarication and lack of leadership.

I am writing this column on a visit to Frankfurt, and from my conversations here there can be no doubt about Germany’s lack of enthusiasm for this aid package. The funny thing is that the Germans, Ms Merkel probably included, really believed in the “no bail-out” clause. They were shocked by events. They failed to see that Article 125 of the Lisbon treaty is the kind of law that is irrelevant until needed, at which point it becomes impossible to apply. Perhaps it was due to 20 years of indoctrination about stability-oriented policy, or simply an intellectual laziness that led the country’s political, economic and legal establishment to conclude that a monetary union could forever run on the basis of rules, without political management.

Here in Germany, the overwhelming view is that this package is not a solution. On this point, I agree. How can a loan guarantee solve a problem of excessive indebtedness? It surely saved the eurozone, which might otherwise have been pushed over the brink this week. But beyond this week, the benefits are less clear. At best, it provides sufficient stability to allow Spain and Portugal to press ahead with reforms. So the judgment about the success of this programme depends critically on whether the two countries can reform their labour markets, sort out their banking sectors, improve productivity and speed up fiscal adjustments. We should remember that, unlike in Greece, the issue in Spain and Portugal is not primarily fiscal, but an excessively indebted private sector. Private debts constitute large contingent liabilities for the state due to the bank guarantees – the result of another expensive European summit two years ago. So unless José Luis Zapatero, Spain’s prime minister, is going to present the mother of all economic reform packages, it is hard to see how the mother of all bail-outs is going to work.

When Ms Merkel went to Brussels on Friday, she had a new stability pact in her handbag. Two days later, she and her country woke up to realise that Europe’s monetary union is going to be something very different from what they had imagined. I wonder how she is going to explain that.

Copyright The Financial Times Limited 2010.