Merkel, in Reversal, Urges Rescue of Euro

For a year, as Europe struggled with its debt crisis, Germany’s chancellor, Angela Merkel, lived up to her nickname of “Frau Nein,” or Mrs. No, by stalling on each rescue effort.

German Chancellor Angela Merkel
Michael Gottschalk | AFP | Getty Images
German Chancellor Angela Merkel

Suddenly Mrs. Merkel is saying “yes,” and that could mean a big leap forward in European integration.

When they meet in Brussels on Friday, the 27 heads of government will hear new ideas on how to save the euro, delivered by Mrs. Merkel and the French president, Nicolas Sarkozy, but written largely in Berlin.

In exchange for bolstering the euro zone rescue fund, Mrs. Merkel will press others to mimic Germany’s economic rise. She is proposing to coordinate retirement ages across countries, scrap any links between wages and inflation and bring corporate tax systems closer together.

In a remarkable about-face, Mrs. Merkel now wants more economic integration in the euro zone, including regular meetings of its leaders.

That sounds similar to a French plan for a prototype economic government for Europe — something once considered so radical that Germany killed it.

But, after months on the defensive, Mrs. Merkel has finally decided that German leadership is good for the euro — and for domestic politics, too.

According to Joachim Fritz-Vannahme, Europe’s director at the Bertelsmann Foundation, a German research institute, the shift comes after a year when her approach to the euro resembled the posture of a small, furry animal “waiting for the big snake to eat her up.”

Instead, she wants to present herself as a leader in Europe, asking other countries for concessions rather than being forced into making them herself, he argued.

Germany, Europe’s economic powerhouse, now appears to agree with the euro’s many critics that, without greater economic convergence, internal strains could make the currency unsustainable.

“They are realistic enough to have learned their lessons, which is that if we want to have a stabilized euro we have to do much more we have to add new elements to the system,” said Mr. Fritz-Vannahme.

French officials are eager to dispel the impression that Paris has taken a back seat, or that there is a new Franco-German dictate coming.

Speaking in Paris, Christine Lagarde, the French finance minister, stressed that these were French-German proposals and were not yet complete.

So no one should be suspiciously wondering “what are the French and the Germans cooking up?” she said.

In Berlin, Mrs. Merkel’s adviser, Uwe Corsepius, briefed European Union ambassadors on the ideas this week and a draft document, prepared by one German ministry and circulating in Brussels, identified six priorities.

These are: abolition of wage indexation systems, agreement on mutual recognition of education qualifications, creation of a common base for assessing corporate tax, adjustment of the pension systems, establishment of a national crisis management regime for banks and new legal measures to force countries to commit to tough fiscal policies through a “debt alert mechanism.”

Under the plan, countries will be measured against economic indicators, their progress verified by the European Commission.

Though both Mrs. Merkel and Mr. Sarkozy have been fiercely critical of the commission and want to limit its powers, neither wants to create a new, parallel structure.

In fact much — though not all — of Germany’s plan was being pushed by the European Commission in its annual growth survey, or in its plans to strengthen the European Union’s rule book with six economic governance proposals.

But that Berlin wants to make these ideas its own gives them vital momentum. The challenge now is for officials to make a series of interlocking reforms into a coherent package by March.

The reforms include plans to bolster the bailout fund for the single currency allowing it, at least, to lend up to 440 billion euros ($608 billion) and possibly to be able to use its cash more flexibly.

In the meantime, the details of Germany’s proposals worry several euro zone nations. Ireland, Estonia and Slovakia, for example, dislike anything that touches on their right to set corporate tax rates. Belgium will resist efforts to break the link between earnings and inflation.

Raising pension ages is likely to be controversial across the bloc. Even the Netherlands, which supports most of Germany’s ideas, is sensitive to suggestions that it might have to alter an economic framework that has delivered growth.

One critical issue remains enforcing any agreement. The commission’s plans to strengthen the euro’s rule book included semi-automatic sanctions against countries that fail to curb deficits.

But these were diluted under a deal between Mrs. Merkel and Mr. Sarkozy.

Guy Verhofstadt, a former Belgian prime minister and leader of the centrist group in the European Parliament, argued that the only effective way of ensuring discipline was through “the empowerment of the commission to act and set real sanctions.”

If that cannot be achieved, another possibility might be to give countries incentives to perform well, perhaps by using the new bailout fund more flexibly and extending credit lines to weaker economies if they take tough measures.

Failing that, Germany will have to rely on moral pressure and try to force heads of government to sign up to commitments at special euro zone summit meetings.

In any event, Mrs. Merkel’s engagement with the euro crisis is seen as essential to its resolution, and her more assertive tone should also better equip her for a series of different electoral tests in Germany this year.

“She hates to be in a situation where she is pushed into things, and she was pushed for nearly nine or 10 months,” Mr. Fritz-Vannahme said.