June 19 (Bloomberg) -- “To put it bluntly: we’re not going to pay,” the German chancellor said.
That threat didn’t come from Angela Merkel, besieged from all sides to save Europe from an avalanche of debt. It was a rare outburst from her pro-European predecessor, Helmut Kohl, against calls that Germany plow more into the common European budget in 1998.
Germany ended up paying, illustrating the contortions it has gone through for the sake of European unity. Today, Merkel faces mounting pressure to make even greater concessions, by putting Germany’s financial muscle behind an integrated banking and borrowing system to keep the euro intact. The question is whether, after two years of muddling through, Europe’s pre-eminent power can act quickly and decisively.
“I think she will remain an incrementalist: we have not yet reached the point where it is obvious that we are hanging over the precipice,” said Paul de Grauwe, a professor at the London School of Economics and two-time Belgian candidate for a European Central Bank post. “It looks again that what is going to come out is going to temporarily pacify markets until it is clear that it is not going to be sufficient.”
The narrow victory by pro-euro forces in Greece’s election bought Europe time without fixing the cleavages between the export-driven, fiscally prudent northern economies and the more welfare-oriented south that planted the seeds for the crisis and dogged the response.
The optimism was short-lived yesterday, as initial gains in the euro and Spanish and Italian bonds evaporated. The overtime runs out on June 28-29, when European leaders meet for the 19th summit since a pledge “to safeguard financial stability in the euro area” in February 2010 launched a process of real-time experimentation with repairing the currency’s foundations.
Europe’s leaders are in the bind of having gone further than they fancied toward a unified economy without going far enough. More than 386 billion euros ($486 billion) in loan pledges for Greece, Ireland and Portugal -- plus another 100 billion euros for Spain’s banks -- break at least the spirit of the “no-bailout” rule.
Some 211 billion euros of bond purchases by the central bank were so unorthodox that they provoked the resignation of both Germans on the bank’s policy-setting council last year. The German central bank, the most powerful voice within the ECB, yesterday opposed further moves toward shared liability for national debts.
Europe now has “quite a significant extra set of tools which did not even exist at the beginning of this crisis,” Richard Corbett, an aide to European Union President Herman Van Rompuy, told Bloomberg Television in Brussels yesterday. The bank-aid pledge to Spain “would have been totally impossible” two years ago.
The crisis makes a U.S.-style centralization of debt management more urgent while raising greater obstacles to it. “Europe is not America and we have quite a different historical path,” EU Economic and Monetary Commissioner Olli Rehn said.
“We are talking about new architecture,” Rehn told Sara Eisen and Tom Keene on Bloomberg Television’s “Surveillance” in an interview from Brussels yesterday. “It is very important to build a convincing roadmap toward completing the economic union, to supplement the already strong monetary union.”
Many national mindsets are ingrained from the pre-euro era, when the EU consisted of 12 western countries. Germany was obsessed with an independent inflation-fighting central bank, France viewed the currency as demand-management tool, dysfunctional politics encumbered Italy with debt, and each country treated its banks as a national fief.
From the 1991 Maastricht Treaty to the 1997 deficit-limiting stability pact, its loosening in 2005 and re-strengthening in the wake of the debt shock, the euro represented the sum of those differences. It still does, now with risks and stakes unimagined by its creators.
“There’s a great continuity in attitudes,” said Niels Thygesen, a retired Copenhagen University professor who served on the 1989 panel led by European Commission then-President Jacques Delors that mapped the path to the euro. The currency’s founders “did understand what the real issues were and where the differences were, but they hoped the differences would be resolved as we moved along. That hasn’t quite materialized.”
In a January paper, Thygesen identified eight clashes in economic philosophy between Germany and France -- some uneasily resolved in the euro’s setup, others that rumble on such as Germany’s insistence on rules-based enforcement of deficit limits and France’s more expansive view of the role of the central bank.
Berlin-Paris tensions were magnified by the election of Socialist Francois Hollande as French president on a pro-growth platform last month. Hollande gained more leverage on June 17 when his allies romped to a majority in legislative elections, giving him a free hand domestically.
No “miracles” are likely at the summit, said an official involved in the preparations. The boldest commitment may be to “rapidly examine” proposals for a shared European bank-resolution and deposit insurance system, according to a draft statement obtained by Bloomberg News.
Merkel herself damped expectations before she left for a Group of 20 summit that wraps up today in Los Cabos, Mexico. “Germany’s power is not infinite,” she said in Berlin June 14.
Details of Spain’s bank relief won’t be sorted out until a June 21 meeting of finance ministers at the earliest. Spanish bonds have tumbled since the offer was made on June 9 because the Spanish government would be required to pay off the European official loans before serving bondholders.
Aides to euro-area finance ministers last week discussed evidence that the junior status reduced the appeal of Spanish bonds without reaching any conclusions, an official involved in those talks said. Spain’s 10-year bond yields reached 7.22 percent yesterday, a euro-era record.
Europe’s crisis remedies have been “too late and second too little,” said Ana Palacio, a former Spanish foreign minister. “The main issue has been not understanding that there was a different dimension altogether. We could not afford reflecting, we could not afford discussing broadly, but we needed action.”
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