In this first phase, Merkel had many opponents. The President of France, for instance, was convinced that if only enough money were to be made available then the markets would settle down. In fact that was the opinion of most international economists: they couldn't make sense of Merkel's demands for budget cuts. Merkel and Sarkozy had a difficult relationship: this was obvious at first sight. When Sarkozy came to Berlin for the first time as President – he was elected a year and a half after she became Chancellor, and so according to protocol had to pay a courtesy visit – there was quite a long delay before he got out of his car at the entrance to the Chancellery. Merkel was waiting at the other end of the red carpet, but the President had no intention of making the first move. As far as he was concerned, Merkel had to come to him, but she didn't. After an awkward moment, the guest finally obliged.
Merkel and Sarkozy were like chalk and cheese. So the relationship they managed to develop over five years is all the more remarkable. Merkel would claim that she wasn't the one who changed – so it must have been Sarkozy who was suddenly ready for compromise, more understanding, less erratic. One of his first visits to Merkel's office was memorable for the fact that the President suddenly leapt up in the middle of a conversation and began making a phone call. Or there was the lecture he gave over lunch in the Paris apartment belonging to his wife Carla Bruni: at a sensitive stage of the financial crisis he told the public that Germany was still busy thinking while France was taking action. Merkel and Sarkozy walked on beaches together, argued in their respective offices, quarrelled publicly, but Merkel noted with amusement that her counterpart seemed to become less and less combative towards her over the years, as if she had had a calming influence on him. In the first months of the crisis, Sarkozy used his ministers to attack Merkel and branded Germany's economic power as one of the main causes of the crisis, but by October 2011 he had started using Merkel's manual on crisis management, and even began preparing his compatriots to start making cuts.
A Race against Collapse
The European Union reacted to the crisis like a body in the grip of fever. At that stage it hadn't built up any immunity to the virus, and it is impossible to predict how many more bouts of fever there will be in future. But at least the doctors have learnt how to recognize the symptoms. So far it has been possible to define three phases of the crisis. The first phase began with the Greek request for aid in April 2010, and the hastily agreed rescue plan that initially prevented the country's bankruptcy. Greece was at the centre of this phase, although Ireland had to be moved into intensive care in November 2010, followed by Portugal in May 2011. Yet the liquidity crisis seemed to be a national problem, a phenomenon that had geographic limits, and defined by the distinctive economic features of the three individual countries. It was at this point that Europeans became acquainted with the main US rating agencies, who, like Cassandra, were always bearers of bad news – or were themselves the cause of it. Whatever the case, intense anger was directed at these agencies, and there were loud demands for the problem to be solved once and for all by means of a vast injection of cash.
This demand was made of Merkel, who as Chancellor of the largest economy in the Eurozone led the way for other, less prosperous countries. She was always faced with the same requests: Eurobonds could help the three countries out of trouble. A single, identical state loan for everyone – it would make life a little more expensive for the Germans and a little more bearable for the Greeks, but at least the supply of money from the financial markets would be taken care of. The logical argument was that those who share a currency need the same financial instruments. Merkel's counter-argument was that the currency might be the same, but the economic policy was not. Eurobonds only make sense if all governments stake their money, borrowed at the same, reasonable rate, and are monitored in the same way. Even more important was the treaties argument: such bonds or liability for debts are not only impossible, but expressly forbidden by European treaties. States cannot finance each other. And even if they wanted to, then German public opinion would have something to say about it.
At an early stage two important institutions supported Merkel's position: the Federal Constitutional Court and the German parliament, the Bundestag. Merkel could feel her own party breathing down her neck, a party in which enemies of the euro could form an angry mob in the space of a few moments. Not only that, the very existence of the coalition was in danger, because the FDP was also split over its policy towards the crisis. The party even had to take a straw poll of its members on whether it would continue with the rescue attempt. And then there was the Supreme Court in Karlsruhe, keeping its beady eye on national sovereignty, which would be undermined if the government removed authority over the budget from the Bundestag.
Merkel soon made it clear that she would give up her resistance to the rescue plan and the support of Greece only on the following conditions. Her first requirement was that debtor states must implement the full package of reforms: they had to get their economies moving and become competitive. It was the only way out of the debt trap. Her second was that she could only politically justify German aid if a repetition of this regrettable situation were to be precluded once and for all – preferably by binding treaties.
Merkel looked for an ally of suitable stature for her plan, and found one in the French President. In October 2010, she and Sarkozy walked along the beach in Deauville at sunset and agreed on the next steps to take. The rescue plan is not enough, they said, there must be a lasting structure, one that is backed by a great deal of money and has equally great credibility. Secondly, this protection can be provided only if the stability pact – what could be described as a constitution that lays down the correct way for Europe to deal with its own money – is improved and embedded in the treaties. Yet Merkel failed in one important demand: she wanted draconian penalties contained in the list of sanctions that would be applied to any state that broke the treaties, the most effective being the withdrawal of voting rights. In Deauville, Sarkozy agreed with her, but soon afterwards the summit of heads of government refused to approve it. Withdrawal of democratic rights was probably a step too far.
This, along with what was generally seen as the Chancellor's diffidence, earned her an almost demonic reputation. Merkel the European Thatcher; Merkel the new Bismarck; Merkel the disciplinarian of Europe. On that year's Forbes List of the most powerful people on earth she slipped to fourth place, and even had to share it with the Pope. In the women's list she was ousted from the podium by Michelle Obama. By the time the Finance Ministers finally agreed to the reform of the stability pact and the creation of the permanent rescue plan of the ESM (the European Stability Mechanism) had got under way, Merkel could consider herself one of the most hated and least understood politicians in the world. But there was worse to come.
The second phase of the crisis began in the summer of 2011, when there was little time left for strolling along the beach. The house was now ablaze, Greece was again on the brink of defaulting on its debts, demands were raining down on Merkel from all sides. Germany and France organized a special summit in Brussels for 21st July. First the various advisers met in Paris, and then President Sarkozy flew to Berlin on the evening before the summit. At the last minute the head of the European Central Bank had been asked to come as well. A government plane brought Jean-Claude Trichet from Frankfurt, and all night long there was heated argument in the Chancellor's office – centred above all on the question of whether private creditors should be asked to make a contribution to the rescue. Sarkozy had many doubts.
Once again the decision required the rescue package of April 2010 to be extended by another 109 billion euros. Private creditors were asked, or rather forced, to exchange their government bonds for securities of inferior value. This dramatic moment, the first time that private investors had been involved in the rescue of Greece, had a price: mistrust grew – and then suddenly spiralled out of control. In July, the interest rate on Italian and Spanish government loans went up
, while in August the European Central Bank was forced to buy up the loans of these two countries in order to ease the pressure on the markets. But within only a few days this measure ran out of steam. It was no longer a question of individual countries: a discussion was now in progress about the Eurozone as a whole, and the rationale behind its currency. The experts’ message was clear: the euro can't go on like this. A common currency needs a common economic policy. The debt crisis had become a crisis of the system itself.
Three months later there was another crisis. Again it was Greece, the danger of yet another imminent meltdown, endless negotiations on conditions for reform and the extension of credit. Amid all the criticism Merkel stuck firmly to her basic principle: money only in return for results. But it was increasingly obvious that not all the money in Greece would be enough to keep the country's debt mountain from crashing down. So, after three rounds of discussion about savings and reforms, Merkel was willing to allow Greek debt to be cut from 160 to 120 per cent of its gross domestic product – a show of strength that required a double summit in Brussels, with a few days in between, because the Bundestag had to be consulted. Among all this turmoil, President Sarkozy missed the birth of his daughter, because he was busy in a crucial meeting in the Frankfurt Opera House.
Merkel was plagued by very different problems. She could no longer rely on the support of the Bundestag. In addition, and with obvious annoyance, the Constitutional Court had made aid for Greece contingent on strict conditions. Merkel was isolated. To an increasing majority she seemed to be the only obstacle to the resolution of the Greek debt problem, because she refused to admit that making aid conditional on cuts was choking the life out of the country. The problem was that no one had a better solution, no one could counter her logic with a credible plan. Everyone acknowledged that injecting all this money might buy time, but it wouldn't solve the basic problems of reform and Greek competitiveness.
German reaction to the catastrophe was self-contradictory: two thirds of the population thought that the conditions were too harsh, and felt sorry for the Greeks. But at the same time a majority would have been happy to see Athens shown the door immediately. Merkel bore the brunt of German anger – never before had the approval ratings for her rescue policy, measured by the research group Wahlen, been as bad as in the autumn of 2011. Merkel responded with an emotional outburst. “If the euro fails, Europe will fail,” she said in a statement to the Bundestag on 26th October. With these words she immediately caught the attention of the German people, who were not necessarily feeling the pain themselves, alerting them to the fact that this was the most severe test that the European Union had faced since its foundation. A heated debate broke out: could Europe really fail, was the Chancellor exaggerating the situation? Surely Europe could function perfectly well without the euro? Among all the turmoil, no one remembered that Merkel had been here before – a year and a half earlier, when the vote was taken on the first rescue package for Greece in May 2010.
At this point Merkel felt deeply disappointed with “her” Europe – a mood that was to continue well into 2012. She hadn't expected to encounter such resentment over her rational approach to the crisis. It made her seethe inwardly when she had to keep explaining to other heads of government why Eurobonds would not put an end to the crisis, but were more likely to make it worse – because they wouldn't make every country equally competitive, which meant that the lifestyle of southern Europe would be financed by the productivity of Germany and the rest of northern Europe. No society would accept that. Merkel always took charts with her to support her argument, brightly coloured curves illustrating the unit labour costs or debts of individual European countries. From the curves it was remarkable to see how stable the euro had been for the last ten years, although Eurozone countries differed enormously in their levels of debt and economic strength.
Merkel often viewed the crisis through East German eyes. She had witnessed the collapse of a system at first hand, and wanted to spare Europe such an experience. She increasingly found allies in the heads of government from Central Europe and the Baltic states, who knew what it was like to fall into the abyss, and were becoming more and more annoyed with the southern Europeans who – as the Poles saw it, for instance – were complaining about what was actually still a high standard of living. By 2011, Europe had become a group of states fighting for national interests, while only idealists were concerned about the functioning of the community.
Merkel felt particularly isolated at the G20 summit in Cannes at the beginning of November. The EU summit in October had agreed the haircut to the Greek debt, the EFSF had been increased again and heads of government were discussing the fiscal compact that they wanted to adopt by December at the latest – a significant political signal, because a legally binding brake on debt would finally become part of the constitutions of all the Eurozone countries. Merkel fended off a request by the French President, who wanted to give the rescue plan a banking licence – another ploy to circumvent control by national parliaments. But then the Greek Prime Minister took everyone, including his colleagues, by surprise, by refusing to accept the haircut that was conditional on more stringent economic action. He announced that the Greek people had to decide. The likely outcome was obvious: rejection.
Merkel fumed, as did France's President Sarkozy. Papandreou was about to ruin all their efforts and throw the single currency overboard. It was at this moment that the group of twenty industrial and newly industrialized states met, and Merkel was shocked to find that a new plan to raise even more money to support the states in crisis was being discussed: the International Monetary Fund would do this by what amounted to mortgaging the gold reserves of the various national banks. Germany froze in horror: gold reserves are sacred, in fact it was illegal to go anywhere near them. Merkel was exposed to a barrage of criticism from all sides but, as tempting as it was to give way, she had to stand her ground. There could be no exceptional levies on the Bundesbank. The other heads of government were furious, statements were drafted, considered and rejected. Eventually, President Obama saw reason and called off the attack. On the flight back from Cannes, Merkel impassively told journalists that yet more work had been done to promote one's own views in the crisis.
This autumn of discontent, however, produced two victories: first, Sarkozy came out in support of the German rescue plan. German-French cooperation worked so well that other members of the EU had to endorse it. The second victory was that the December summit gave the go-ahead to develop the latest product from the House of Merkel. This was the fiscal compact – a comprehensive commitment to keep national budgets under control.
Merkel could also enjoy two quiet triumphs. In Italy, Silvio Berlusconi resigned: the pressure had simply become too much, and the Prime Minister could not get his coalition government to agree to any more reforms. Merkel must have been delighted, as Berlusconi belonged to the group of self-serving politicians whom she tried to avoid. He had always been deaf to the reasoning behind her rescue plan: his newspapers mounted attack after attack on “Merkel's Third Reich”, and records of bugged phone calls emerged in which he poured unprintable scorn on the German Chancellor. With the consent of all the political parties, the technocrat Mario Monti took over, and within four weeks had managed to change the markets’ attitude in favour of his country. In the meantime Spain was holding elections, and ejected the Zapatero government, which was unwilling to introduce reforms. The new Prime Minister was a conservative, Mariano Rajoy, of whom Merkel initially had high hopes. In all, seven European governments succumbed to the crisis – almost half the Eurozone had had to change its leaders.
But Merkel had made two bad mistakes, the consequences of which were to be felt within the next six months. Along with Sarkozy, she prevented the Greek people from voting against the rescue package by indirectly threatening the despairing Prime Minister, Papandreou, that Greece would be kicked out of the Eurozone. Never before had Merkel expressed herself so clearly about the Greek problem,
and she would never do so again. Papandreou gave way, withdrew his plans and resigned. As a result Merkel landed herself with a huge domestic problem in the form of Greece. For six months, work in Athens came to a standstill, with transitional governments and two elections.
The second mistake was more serious, because it caused the crisis virus to spread round the entire Eurozone even more rapidly: Merkel assured the community that private creditors would have to play their part in writing off Greek debt. The message to investors was a stark one: trust your money with us and you might not get it back. The financial markets obviously understand risk, and generally take it into account. Yet up till now there had been virtually no risk involved in lending to governments. Government bonds had to be secure in the Eurozone, even more so than anywhere else. So the decision to involve private creditors had an immediate effect on the behaviour of investors. Suddenly, no one wanted Italian and Spanish government bonds.
Finally, there was a third piece of news that gave cause for concern: Great Britain and the Czech Republic didn't want to be part of the fiscal compact. Prime Minister David Cameron had got carried away with his demands. The Tory MPs in the House of Commons was unwilling to agree to any new European treaty. This refusal had consequences: the fiscal compact could not be included in the existing European treaties – this would only work if all the EU member states agreed. So the compact had to be negotiated separately, and concluded directly between the states concerned. When it comes to international law, this was no trivial matter; the very logic behind the European treaties was being twisted – and many people didn't even notice. In the Chancellor's office there were no doubt some who rubbed their hands with glee. Merkel herself preferred Brussels not to have any new rights of supervision, and thus more power.
Angela Merkel Page 20
