ANALYSIS:As far as Angela Merkel is concerned, the measures already agreed are enough to secure the euro's future, writes DEREK SCALLYin Berlin
THE MELODY accompanying Berlin's euro-zone crisis strategy is increasingly audible: Que Sera Sera.Berlin officials are convinced their strategy – whatever will be, will be – is correct. It's an attitude tainted by an optimistic fatalism that speculative haste elsewhere in the euro zone will not improve the euro's prospects.
“We don’t want to show ill will towards others in the euro zone, but we have a firm belief that we are right,” said a confidante of German chancellor Angela Merkel yesterday. “We have a huge interest in being correct and we want to end the cacophony.”
But how? Merkel returned from the Dolomites to Berlin over the weekend but is remaining on holidays, ostensibly not to scare markets, even if she is spending hours on the phone.
As far as she is concerned, the measures agreed at the EU’s summit on July 21st – to be ratified by national parliaments next month – are enough to guarantee the euro’s future.
Everybody involved has an interest in making sure that what was agreed is enough, said one finance ministry official yesterday. “The markets, too, have to have an interest that we pull through,” said the official.
In addition, Merkel and French president Nicolas Sarkozy (pictured together above) have promised “extremely ambitious” proposals to transform the European Stability Mechanism – the post-2013 successor to the current European Financial Stability Facility (EFSF) – into a European Monetary Fund with robust powers of national budgetary oversight.
Until then, Germany is determined to face down calls to enlarge the size of the EFSF for Italy or anyone else, fearing the euro zone’s rescue ring would start to sink.
“Any increase in size would only be an invitation to speculators to find out how much the euro zone is still prepared to give,” one senior unnamed official told Der Spiegel magazine. And the official had a warning to Rome: “An economy like Italy’s cannot be supported” by the EFSF.
And what of the eurobond? Even mentioning the word prompts a bad-tempered reaction in Berlin. German politicians fear such an idea would be a tough, if not impossible, sell to their voters, particularly if it weakened the reform zeal of struggling euro-zone neighbours.
“We don’t think much of any plans to socialise European debts, particularly as Germany is one of the few countries who would have to carry such a guarantee,” said Horst Seehofer, head of Merkel’s Bavarian coalition partner, the Christian Social Union, last night.
He said he was “not at all” interested in a European finance ministry but was a “big fan of automatic sanctions”.
Asked about eurobond solidarity, German finance ministry officials always point out the downside: a downgrade of Germany and the other five AAA-rated euro-zone states, with increased borrowing costs. In Berlin, officials talk of “€20 billion in extra borrowing costs in the medium term” – and all for, potentially, only a minimal drop in borrowing costs for eurobond beneficiaries.
Merkel has decided that the eurobond figures do not match the risk. “If you throw ice cubes into a pan of boiling water, the ice cubes melt and the water is still hot,” said one Merkel adviser yesterday. “If eurobonds don’t work, we’ll have ruined Europe and helped no one.”
There was much head-scratching in Berlin over the phone conference of European Central Bank president Jean-Claude Trichet. Berlin says the July 21st summit gave the Frenchman all the tools he needs to buy Italian bonds. But they suggest the departing president is anxious to leave as orderly a mess as possible for his successor. In particular, they believe he is anxious that the Frankfurt bank is not left holding sovereign bonds after the EFSF powers to buy bonds are expanded.
ECB bond-buying has been opposed by several euro zone central banks, including the Bundesbank, which opposed last week’s renewed buying of Irish bonds. In Berlin, Merkel officials respect the Bundesbank’s position but say more pragmatism is called for, at least until the EFSF is able to take over the job.
“Until then it’s up to the ECB to act,” said a Merkel adviser.
For Deutsche Bank chief economist Thomas Mayer, it is impossible to forecast whether the downgrade will generate “a summer storm or a tornado” when markets open this morning. But, he said, it has made clear the need to accelerate progress towards a fully-fledged European Monetary Fund.
Germany’s media does not share official Berlin’s calm: both Sunday broadsheets headlined their euro-zone coverage yesterday “the Crash”, while Der Spiegel’s cover today shows dollar and euro banknote paper planes crashing in flames beneath the headline: “Is the world going bankrupt?”
