Merkozy rides again

Saving the euro, part 473

  by B.U. | BERLIN

ANGELA MERKEL and Nicolas Sarkozy kicked off the 2012 season of the euro soap opera with a summit meeting in Berlin today. Neither said anything startling; certainly nothing that would betoken a swift and happy conclusion to the long-running saga.
The German chancellor and the French president muted their differences over such issues as how quickly to introduce a tax on financial transactions and what the role of the European Central Bank (ECB) should be in supporting shaky members of the euro zone. “Our analysis is the same,” said Mr Sarkozy at the post-summit press conference.


This did not calm markets’ nerves. The euro dropped to its lowest level against the dollar since September 2010 ($1.266) before the summit and recovered marginally as the two leaders met. Currency traders’ biggest worry is Greece’s failure to meet its fiscal targets, which means it may not get the fresh money it needs to avoid defaulting on its debt.
At the opposite end of the confidence spectrum, investors are so eager to finance Germany that they accepted a negative interest rate on an auction of six-month paper, in effect paying Germany’s government for the privilege of lending to it. Germans will see this as vindication of their prudent policies, but it also serves to underline the dangerous economic divergences within the euro zone.
The main significance of the Merkozy summit is that it seemed to signal a shift in emphasis. True, the austerity agenda—promoted by the Germans and grudgingly accepted by the French—is still there. Indeed, Mr Sarkozy boasted that France’s fiscal deficit was smaller than expected in 2011. Europe is making swift progress towards a “fiscal pact” to limit deficits, proclaimed Mrs Merkel, including German-style “debt brakes”. A new treaty should be signed by March.
But fiscal self-denial will now be supplemented by what Mrs Merkel called a “second leg”, meaning economic growth and job creation. This is partly meant to help Mr Sarkozy, who faces a tough re-election fight this spring.
All euro-zone countries, including Germany, are “prepared to do their homework” in this area, the chancellor promised, but it is not clear that much new is on offer. A big German stimulus package to boost growth in neighbouring countries is not in prospect (that would nobble the fiscal leg).
Mrs Merkel spoke of spreading best practice in labour-market regulation across the euro zone (which is German practice, Mr Sarkozy admits) and spending existing European funds more quickly and effectively. Both ideas make sense; neither will prevent further financial turmoil, or a European recession. In the latest sign of fragility, German industrial production dropped 1% in November.
The leaders tried to seem anything but complacent. Mr Sarkozy called the situation “very tense” and Mrs Merkel said they had “understood the needs of the hour.” The intention is to keep Greece from dropping out of the euro zone, but whatever happens Greece is an exceptional case, the leaders said (perhaps fearing that a Greek default or even an exit from the euro could not be avoided). As always, the chancellor dampened expectations of a quick “one-dimensional” solution to the crisis. The problem would be solved, she said, “step by step.”
The next steps involve Italy, an indebted giant that poses a far greater threat to the euro than Greece. Mrs Merkel will meet Italy’s unelected prime minister, Mario Monti, in Berlin on Wednesday; she and Mr Sarkozy will hold a three-way summit with him in Rome on January 20^th. European heads of government are to gather, probably on January 30^th, to put the finishing touches to the fiscal pact.
Also on the agenda, no doubt, will be a proposed financial-transactions tax. Britain is threatening a veto; Mr Sarkozy has said France will go it alone at first, if need be. Mrs Merkel wants the tax but her junior coalition partner, the Free Democrats, do not unless the British get on board. As the crisis sharpens, disagreements are likely to re-emerge over the role of the ECB and how to strengthen the euro zone's bail-out funds. The soap opera has a long way to run.