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Analysis
Merkel’s brinkmanship over European treaties shows Germany’s new confidence

Merkel’s brinkmanship over European treaties shows Germany’s new confidence

Discord with France looms as German Chancellor demands legal changes over euro

by David Marsh

Mon 1 Nov 2010

The high-risk, high-stakes line taken by Angela Merkel, the German Chancellor, over reforming the rules for economic and monetary union (EMU) is one further sign of the impressive confidence generated in Berlin by Germany’s above average economic recovery this year.

Ms Merkel faced near-isolation at the two-day European Union summit that ended on Friday over her call for the other EU members to reopen negotiations on a new international treaty to improve European governance. This is the condition, she says, for Germany to continue to provide help for debt-hit southern members of the euro, led by Greece, Portugal and Ireland, once the temporary stabilisation facility controversially agreed six months ago runs out in three years. The summit ended with a lukewarm agreement that the EU will try to agreed a “limited” rewriting of the European treaties to enshrine stricter permanent rules for government bailouts within EMU beyond 2013.

A permanent crisis fund is to replace a temporary one, worth €440bn, which was set up at the height of the euro crisis centred on Greece in May. The current treaty needs amending, Germany says, to turn the EU’s emergency assistance into a fully-fledged mechanism for dealing with errant states. This would involve tough rules on fiscal excesses and the possibility of declaring hard-up states insolvent so that private as well as public creditors have to help with debt rescheduling. This last stipulation was opposed by Jean-Claude Trichet, president of the European Central Bank, when he attended the summit in Brussels last week, on the grounds that it could lower bond market acceptance of the debt offerings by weaker countries. However, Ms Merkel looks set to have her way.

This is the third time in recent months that the German Chancellor has thrown down the gauntlet to her European partners. Already she played tough at the beginning of the year by refusing to consider bail-out measures for Greece until Athens had inaugurated a credible budgetary savings programme. And then she insisted on the involvement of the International Monetary Fund to police lending packages for both Greece and the other southern states as part of a package of measures to shore up the credibility of bail-outs, hotly contested in Germany on both political and legal grounds.

By sticking in her heels over the IMF – a battle she eventually won – Ms Merkel found herself in opposition to both her own finance minister, Wolfgang Schäuble, and also the European Central Bank, whose officials were initially dismayed at the idea of bringing in a Washington-based body to carry out European fire-fighting.

Buoyed by Germany’s new-found economic vitality, with German growth now heading for 3.4% this year, according to German government estimates, Ms Merkel is getting used to winning her European skirmishes. But this time, in the struggle over a new treaty, she may have bitten off more than she can chew.

Ten days ago Ms Merkel agreed with President Nicolas Sarkozy to water down proposals for rigid controls on states’ budget deficits in exchange for reopening the fundamental treaties on European Union. She argues that a new treaty is necessary to make EMU support consistent with Germany’s traditional hard money policies and also the strictures of the German constitutional court.

Ms Merkel is uneasily aware that the €440bn rescue package for indebted euro countries expires only a few months before the next German parliamentary elections in autumn 2013. German voters, who have grown progressively more sceptical about the euro in the past few months, will want a watertight mechanism in place well before that, she feels - otherwise her Christian Democrat party is likely to be punished at the polls.

European leaders are understandably reluctant to envisage further European treaty amendment. The last set of governance changes in Europe under the Lisbon treaty took eight years of wrangling and multiple setbacks before the new agreement finally came into force.

According to people who have spoken to Chancellor Merkel, she has expressed worries in private conversations in recent months that the May bail-outs may be judged unconstitutional. Fear of such a ruling spurred the board of the Bundesbank, the German central bank, to oppose, in a secret meeting on 9 May, the ECB’s controversial decision (finally reached in the early hours of 10 May) to start purchasing the bonds of weaker states. Shortly afterwards, Axel Weber, the Bundesbank president, went on the record to make his opposition public. Weber is Germany’s candidate to take over as the ECB’s new president in autumn next year – but he has made clear he will take the job only if all EMU member states agree rigorous ‘stability-first’ German-style principles – a condition that France would find difficult to digest.

As Ms Merkel shows brinkmanship over the aid package, and controversy builds over Weber’s candidacy, there is plenty of room for renewed squabbling between Germany and France next year.

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