Charlemagne
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And then there was one
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Germany now stands alone. But its power may weaken the euro zone
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Jan 21st 2012
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CREDIT-RATING agencies are a favoured scapegoat of many European politicians, incurring mounting wrath as they downgrade the debt of one sovereign after another. They stand accused of ignorance over European reforms or even of being part of an Anglo-American conspiracy to destroy the euro. Such opprobrium owes much to the fact that, although they are flawed arbiters, the rating agencies can speak uncomfortable truths. The decision by Standard & Poor’s, one of the big three, to downgrade nine European governments on January 13th was an example. S&P punctured the optimism over recent bond auctions in Italy and Spain. It chastised governments for their inadequate response and their misguided obsession with austerity. And by drawing so many into the net, it made clear that the problem is not just individual countries, but the euro zone as a whole.
Above all, by downgrading France from its AAA status—and by leaving Germany as the only top-rated country with a “stable” outlook—S&P has changed the balance in Europe. At a stroke, it has restored the dividing line down the Rhine that generations of leaders have tried to efface, ever since the European Union’s forefathers pooled their coal and steel industries in the 1950s.
With the loss of its top status, even if by only one notch, France has lost its symbolic parity with Germany. In spirit, at least, France leaves the directorate of virtuous, solvent northern states that set the terms of the EU’s response to join the Club Med problem countries. The Franco-German tandem has become a unicycle.
The balance of power has long been shifting from the French president to the German chancellor. Yet as the crisis has gone on, Angela Merkel and Nicolas Sarkozy have cleaved to each other to the point where many have come to resent the diktats of “Merkozy”. Now the very notion of “Merkozy” sounds hollow. As Thierry Breton, a former French economy minister, puts it, “Berlin is alone in the cockpit.”
It is surely no coincidence that Mrs Merkel is making a point of widening her circle of friends. Instead of huddling only with Mr Sarkozy, she is hosting informal dinners with other leaders, starting with the prime ministers of Portugal, Sweden and Austria on January 19th. She likes Italy’s technocratic prime minister, Mario Monti. Her entourage insists that none of this supplants the partnership with France.
But plainly she feels a need to supplement it. Such meetings may be similar to those she organised in 2007, when Germany held the rotating EU presidency. In a sense Germany now acts like a permanent president.
It is an old tenet of European politics that the Franco-German partnership is necessary to disguise German strength and French weakness. With the fiction now dispelled, what will be the consequences? Any change will be incremental. Germany will not forsake France. It is still too uncomfortable to wield unilateral power overtly. Some have called Germany an “adolescent hegemon”, but it is probably even less than this. The Germans dominate by default, not by choice. Mrs Merkel speaks of “a strong Germany in a strong EU”. But these days Germany is strong mainly because the rest of the EU is so weak.
The Germans know what they do not want: no transfer union, no Eurobonds and no transformation of the European Central Bank into a lender of last resort. But it is harder to discern a vision for Europe behind the slogan of a “stability union”. Germany wields power in Europe in three ways. As the biggest economy it has the deepest pockets, so its views tend to prevail. Second, it has the force of example. Its economic output has surged above pre-crisis levels and unemployment is at an historic low. Others might now copy its model of “ordo-liberalism”, balanced budgets and labour-market reforms. And third, Germany’s attachment to legal order pushes it to enshrine its doctrines in European treaties, creating political turbulence across the union.
It also overemphasises deficit-cutting. This risks pushing Europe into a co-ordinated and self-defeating recession—a “suicide pact”, in the words of Joseph Stiglitz, a Nobel-prize-winning American economist. Certainly Greece looks like being sucked into a death spiral. Recent talk of “growth-enhancing” measures has centred on overdue structural reforms in weaker states. But perish the thought of boosting German demand to help others. Or even of pursuing structural reforms in Germany itself.
More important, the German prescription misdiagnoses the crisis as caused by poor enforcement of fiscal rules, rather than by poor design of the euro itself. In a recent paper, Jean Pisani-Ferry, director of the Bruegel think-tank in Brussels, says the fragility of the euro zone is due to an “impossible trinity” in its structure: no mutualisation of debt; no monetary support for states by the ECB; and a feedback loop between unstable sovereigns and banks. At least one, if not all, of these constraints needs to be broken to save the euro.
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.Standing alone, and stubborn
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Alas, the changing power balance in Europe will make it harder to alter the perilous route that Germany has charted. Although protectionist and abrasive in his quest for a core Europe, Mr Sarkozy is right on many points—wanting the ECB to act as a lender of last resort, for instance. He will struggle to be heard, even if he is re-elected in May. And although S&P criticised the emphasis on austerity, its confirmation of Germany’s AAA rating will be taken as vindication of Mrs Merkel’s policies.
For many Germans, in their relative well-being, the crisis still feels distant, even abstract. This means Mrs Merkel’s priority will be to limit Germany’s large liabilities. Even the slow sinking of France may not shift her until it is too late.
Mrs Merkel has made many a course adjustment over the past two years. But her tendency to change only at the eleventh hour risks disaster for all.
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