Titans clash
October 25, 2011
The summit on Wednesday won't be the last to address the pressing issue of how to rescue heavily indebted countries, banks, and ailing finance systems. German Chancellor Angela Merkel believes the crisis can only be overcome by taking small steps. Merkel is often rebuked for her hesitancy in setting a firm course - even from her European colleagues - but she knows that she will be responsible for tough decisions that will affect Europe for years or maybe even decades down the road.
Merkel and many other top EU politicians have the arduous task of understanding what they actually need to agree on while sorting through the conflicting advice of various experts. That's why the deliberations of the EU have become more chaotic than they have been in a long time.
The biggest problem in the eurozone is that its two most important countries - Germany and France - still aren't in agreement even after the weekend's marathon summit about how the banking crisis, the debt crisis, and the confidence crisis can be taken care of all at once.
Which side will prevail?
Merkel is not prepared to throw more German taxpayers' money at Greece and other stricken countries. She is not prepared to solve the crisis by raising funds through the European Central Bank (ECB) because the fear of inflation is too high in Germany. French President Nicolas Sarkozy, on the other hand, says France can no longer afford to keep rescuing its own banks while also bailing out other countries.
According to the French view, even raising the European Financial Stability Fund (EFSF) to one trillion euros ($1.39 trillion) isn't enough to convince creditors to purchase European bonds.
For that reason, France wants to convince the ECB to make an unlimited amount of capital available. French experts think this would be cheaper in the end than constantly creating new funds. The prevailing sentiment in Paris is that a blanket debt reduction in Greece would have incalculable consequences for other countries on the brink, such as Spain, Italy, and even France itself. At the moment, neither the German nor the French side can gain the upper hand, which is why the negotiations are so unbelievably tough and slow.
Temporary solution likely
The second half of the summit this Wednesday will probably result in a three-way compromise. It won't bring a long-term solution, but it will buy a few more months of negotiating time. An agreement on cuts to Greek debt can be agreed upon, but not one that would bring the country back on its feet.
Such an agreement would, however, be good for French banks. The banks' capital would be raised just enough that they could survive a Greek bankruptcy, but not an Italian default as well. The EFSF will be expanded, but not enough to regain global creditors' confidence in the eurozone. The big question of whether to adopt the German or the French proposals will be shelved.
The ECB is key
The United States and Britain prefer the French model, which involves putting up with circulating more currency and higher inflation. That is the model both those countries have followed, anyway. The financial markets probably expect that Europe will follow the American model, which could mean Germany will end up having to make concessions to save Europe. It wouldn't be the first time Merkel had to take a position that only weeks earlier she had considered completely out of the question.
At the moment, Germany's best ally in this decisive argument in Europe is the European Central Bank (ECB). It doesn't want to directly finance countries; for one, because it's not allowed according to EU agreements.
The big question, though, is how long the ECB will stick to its guns and just say no. That is made even more complex by the fact that there's going to be a changing of the guard at the ECB at the end of the month. France's Jean-Claude Trichet is retiring, and Italy's Mario Draghi will replace him. The first time the ECB "sinned" was 18 months ago, when it agreed to buy government bonds. The next supposed no-go area - unlimited financing of the eurozone rescue fund, could follow, because there isn't another option. We'll know more on December 9, two EU summits from now.
Author: Bernd Riegert / mz
Editor: Nicole Goebel