Europe’s currency union may be inching ever closer to the brink of collapse, but Chancellor Angela Merkel has a message for those pressing her to ride to the rescue: Germany is not as strong as it looks, and certainly not strong enough to prop up the rest of Europe.
“Germany’s strength is not infinite,” Ms. Merkel told the Bundestag on Thursday. “Germany’s powers, too, are not unlimited. Consequently, our special responsibility as the leading economy in Europe means we must be able to realistically size up our powers, so we can use them for Germany and Europe with full force.”
The most important actor in the European drama, Ms. Merkel said that she would resist any outside attempts to force Germany to consent to what she called “simple” and “counterproductive” quick fixes. Once again, she rejected jointly issued euro bondsor other forms of shared debt, which several leaders, including President François Hollande of France, have called for.
“I know that it is arduous, that it is painful, that it is a drawn-out task,” Ms. Merkel said. “It is a herculean task, but it is unavoidable.”
Behind the scenes, however, Ms. Merkel is pressing allies in Paris, Rome and elsewhere to cede more power to Brussels over their national budgets before Germany would agree to provide further backing for joint efforts to bolster the euro zone. In her speech, Ms. Merkel hinted at this approach by emphasizing her view that the only way for Europe to recover fully from the crisis is to strengthen political and fiscal unity to support its monetary union.
But that is a long-term strategy. And given Ms. Merkel’s firm stance, coupled with Germany’s longstanding reluctance to make more aggressive moves to shore up the euro , Europe faces a more immediate question: If the Continent’s largest economy cannot or will not stop the euro zone from falling apart, who will?
“Merkel still thinks it’s all about introducing new rules, making countries stick by the rules, and if they stick by the rules the situation will stabilize,” said Philip Whyte, a senior research fellow at the Center for European Reform in London. “She seems to think that she has a lot more time than the markets seem to think.”
Ms. Merkel delivered her pessimistic message as she prepared to fly to Mexico for a two-day summit meeting beginning on Monday, right after a critical vote in Greece on Sunday that could determine whether the country remains in the euro zone. Investors, meanwhile, briefly pushed Spanish bond yields over the key threshold of 7 percent on Thursday, a level that had previously prompted international bailouts for Greece and two other members of the 17-nation euro zone.
With larger economies like Spain and Italy teetering, Ms. Merkel’s stern warning was not just posturing for a domestic audience opposed to bailouts, or tactical positioning before a summit meeting. Her statements reflected a growing fear in Germany that too many guarantees and payouts could threaten its own top credit rating.
That, in turn, would undermine the euro zone’s rescue efforts, which are predicated on Germany’s low borrowing costs and high standing in the markets. Indeed, German bond yields, which have been at historically low levels as investors have sought havens, have begun to creep upward in recent days.
At the Group of 20 meeting next week in Los Cabos, Mexico, the pressure for Ms. Merkel to find a way to contain financial instability and encourage growth is likely to be fierce. But far from turning toward stimulus or agreeing to some form of jointly issued debt, Ms. Merkel’s advisers say that she will remind fellow leaders of their pledges to cut budget deficits in half by next year, as Germany has done.
Ms. Merkel has found herself in a difficult political balancing act. Anger in Germany over the rising price tag for bailouts continues to grow, with more than two-thirds of those surveyed in a recent poll saying that they wanted Greece to leave the euro. But business leaders in this export-driven economy are pressing her to salvage the currency that has served them so well.
The results of a Greek exit could be unpredictable. Higher borrowing costs already threaten to turn the $125 billion bailout of Spain’s banking sector into a full bailout of the country’s government, the same rescue that Portugal, Ireland and Greece received. But a full bailout of Spain would severely tax European Union resources and turn the full glare of market scrutiny onto Italy, the third-largest economy in the euro zone, after Germany and France.
Hard-liners in Germany contend that the painfully high yields that countries like Spain and Italy are forced to pay are actually a good thing, because they keep the pressure on to make politically unpopular changes to labor laws, to raise the retirement age and to pursue other structural changes in their economies that impose immediate pain but promise a long-term improvement in competitiveness.
A majority of Germans opposed the introduction of the euro in the first place, but they took some solace in the fact that bailouts between European countries were prohibited. Now many Germans feel betrayed as the price tag to hold the currency union together has grown.
“They really want to see blood,” said Irwin Collier, a professor of economics at the Free University in Berlin. “They really want to see the austerity hurt.”
Mr. Collier said Germans were suffering from “transfer fatigue” after two decades of sending money to the former East Germany to rebuild it.
The top-selling book in the country is “Europe Doesn’t Need the Euro,” by Thilo Sarrazin, a provocative former member of the executive board of the German Bundesbank. The daily newspaper Die Welt devoted two pages on Sunday to whether Germany could leave the euro, under the headline “Return of the D-Mark. Would It Work?”
While a majority of Germans say they want to keep the euro, and support for the European Union cuts across party lines, there is a growing fear that dissatisfaction could spur the creation of Germany’s first mainstream anti-Europe party.
“In private there’s a rather large debate going on in Germany,” Mr. Whyte said. “What I’m hearing at the moment is a cacophony. There’s clearly not any single German view within policy-making circles.”
German officials are exasperated with colleagues in other countries, whom they see as ignoring European treaties and their own constitutions in calling for new instruments like euro bonds, which the German constitutional court has signaled it would probably strike down under current laws. The idea that countries would pool liabilities without ceding authority over budgets to a central authority is viewed in Berlin as naïve.
But Germany has not closed the door to creative solutions to the crisis. Increasing attention has been paid here to a proposal by the government’s independent council of economic experts to pool excessive debt. A single, limited fund, rather than an open-ended commitment, might have a better chance of clearing the constitutional hurdle.
A summit meeting of European leaders in Brussels at the end of the month is supposed to lead to a road map for overhauling the currency union, but Ms. Merkel is afraid of letting market expectations of a “big bang,” as she put it recently, get out of control.
“We do not create policies for the markets, but for the future of our people,” Ms. Merkel said, to applause from lawmakers.
The problem for Europe is that the two are becoming increasingly inseparable, and lenders are pressing for action.
“They will do anything to save the situation, because they do not know what will happen afterwards,” said Roland Döhrn, an economist at the RWI Institute of Economic Research in Essen. “Politics move very slowly in a world where problems move very fast.”