But if Merkel keeps holding out against bigger fixes to ease other countries’ pain, she could eventually fracture the fragile coalition of 26 European Union countries that pledged on Friday to work toward slashing their budgets and their borrowing, analysts say.
Whether Merkel upsets her own voters or the rest of Europe, the continent is likely to see even more tumult. She vowed to have a treaty ready for approval by March, but much could unravel before then. Italy and France face especially large borrowing needs in the first months of next year, according to economists’ calculations, and the nine non-euro-zone countries that signed the pact pledged only “the possibility to take part in this process.”
Germany “didn’t deliver any more than they wanted to deliver,” said Ulrike Guerot, head of the Berlin office of the European Council on Foreign Relations, a think tank. “There’s no game change here. Markets smell it.”
Game change for Europe, many analysts say, would be allowing countries to borrow money with the backing of the rest of the euro zone — eurobonds — or allowing the continent’s printing presses to turn on a spigot of euros that the European Central Bank could use to decrease countries’ borrowing costs.
Merkel has hinted that once countries lock themselves into the austerity regime, she might allow eurobonds, but Germany forced them out of the agreement reached on Friday. Her moves have received a muted reaction in Germany, with politicians to her left saying she’ll need to go further, and politicians to her right swearing that if she does, she will face a rebellion.
“If there is a linkage in Europe, that the treaties are being changed . . . only on the condition that the European Central Bank may continue to buy up bonds, that is a Pyrrhic victory for Europe,” Frank Schaeffler, a euro-skeptic parliamentarian in Merkel’s coalition, said Saturday on Deutschlandfunk Radio.
Germany has focused on addressing some of the root causes of the crisis — the strains of having widely differing economies, running at various speeds, united by a single currency — while betting that those fixes will give investors more confidence, spurring them to increase lending to European governments. The narrowed tap to governments has cut the flow to the broader economy to a trickle.
“Our philosophy is that you cannot solve a debt crisis by making it easier to take up more debt. The answer to a debt crisis is budget discipline, is to understand that you cannot spend more money than you earn,” said German Foreign Minister Guido Westerwelle in an interview.
Pact subject to change
The agreement reached Friday faces a long, winding path to action, and many details have not been decided. At its core, it commits European countries to years of tight cutbacks as they throttle their deficits down to near zero and squeeze their overall debt to 60 percent of the size of their economies. Few countries in the European Union currently meet the mark — and even Germany falls far short. Countries that miss benchmarks could face punishment meted out by Brussels.
Twenty-six of the E.U.’s 27 countries joined the pact. But a veto by Britain leaves in question the legality of using the E.U.’s institutions to enforce it, although European officials said Saturday that they would find a way. The treaty may also wind up in front of voters in Ireland and the Netherlands, who have rejected E.U. plans in the past. Other countries that don’t use the euro, such as Hungary and Sweden, wavered until the last moment on Friday and left only the faintest of hints that they were on board.
Even if the pact takes effect, countries could ignore its requirements, which France and Germany did with a similar deal in 2003, when they successfully lobbied to loosen requirements after economic problems pushed their deficits past the limits.
Nor is it clear that the deal is enough to satisfy demands from the ECB. Bank President Mario Draghi said Friday that he thought the results were positive, but Reuters reported that the bank was instituting a new cap on its current, modest efforts to lower countries’ borrowing costs, citing bank sources.
On Saturday, the head of Germany’s central bank, Jens Weidmann, said that he saw “progress” in the meeting’s results. But in an interview with the Frankfurter Allgemeine Sonntagszeitung, he said he remained opposed to an expanded role for the ECB, where he is a member of the governing board.
“Financing government debts by printing money is and will remain prohibited by treaty,” he said.