The euro, the European Union’s boldest and most ambitious project, is under threat. Divisions among Europe’s leaders, and their inability to stabilise the euro, have damaged the EU’s reputation on other continents. The good news is that the EU now has an emerging leader. Chancellor Angela Merkel is setting the agenda. The bad news is that some German policies may do more harm than good. Thus Germany’s insistence that the future “crisis resolution mechanism” should make bond-holders take a loss has scared investors, pushed up Ireland’s and Portugal’s cost of borrowing and made their bail-out more likely.
That Germany has taken the lead is not surprising. The economy is performing quite well and it will pay the biggest share of any bail-out. But while Ms Merkel is willing to help eurozone countries in trouble, she is constrained domestically on two fronts. She has a legal problem: the German constitutional court could rule against a permanent rescue mechanism, since it would breach the EU treaties’ no bail-out rule. So she wants the treaties changed to allow such a mechanism. She also has a political problem: the Bundestag could refuse to provide for insolvent countries unless private-sector creditors share the pain. So she wants her EU partners to accept that principle.
Ms Merkel will probably get her way. While France and many other governments had opposed her on both points, at last month’s Franco- German summit, President Nicolas Sarkozy accepted her arguments. This shift reflects France’s increasing anxiety about Germany’s economic strength and assertive diplomacy. German exporters have performed much better than those from other EU countries in Russia and China. The French wonder whether the growing economic divergence between Germany and its partners may make it more eurosceptic and less willing to work through the EU.