Charlemagne | Euro-zone governance

Game, set and match to Angela

Germany's chancellor wins the day at a European summit

By The Economist | BRUSSELS

“I AM on the whole quite satisfied with the decision.” With these modest words, Angela Merkel, Germany's chancellor, rounded off a remarkable victory at the end of a bruising European summit that concluded today.

Less than a fortnight ago, members of the European Union were universally opposed to Germany's demand to reopen the EU's treaties to strengthen the means of maintaining fiscal discipline among members of the euro zone. But within days of winning over Nicolas Sarkozy to her cause at the Deauville summit on October 18th, she got everyone to sign up to the idea of a “limited treaty change”. By the slow-moving standards of the EU, this happened in an eye-blink. It is a testament to the authority of Mrs Merkel, as well as the power of Germany's constitutional court in Karlsruhe.

“Everybody was very sensitive to Mrs Merkel's persuasive arguments,” is how one national diplomat put it. “Bullying,” said another. Whether by persuasion or compulsion, Mrs Merkel secured her main objective: agreement to amend the EU treaty to allow the creation of a “permanent crisis mechanism” to resolve the debt of countries that may be hit by a Greek-style crisis in future.

This means creating a bail-out fund similar to the €750 billion IMF-backed temporary financing facility that was created in May, imposing tough conditions on any country that taps it in future and making bondholders take some of the pain of saving insolvent countries. “The burden must never again be borne simply and only by the taxpayer,” she declared.

Of course, Germany had to make concessions along the way. It had to acquiesce to French demands that any sanctions against profligate countries be less automatic than those suggested by the European Commission, giving finance ministers more of a say on when to pull the trigger of “semi-automatic” penalties.

After an often acrimonious debate, Germany also had to yield on its demand that any treaty amendment also include a provision to withdraw the voting rights of countries that persistently breach fiscal rules and EU recommendations for remedial action. Smaller countries, in particular, did not like the threat of being disenfranchised. Had such an amendment been made to the treaty, such a loss of sovereignty would have meant that Ireland would have had to call a referendum on the revised document. This would almost certainly be lost.

So in the end, Herman Van Rompuy, the president of the European Council, was asked [PDF] to draw up treaty-change proposals for the “crisis mechanism” to be agreed at a summit in December and implemented before the expiry of the temporary safety net in 2013. Mr Van Rompuy will “subsequently examine” the question of voting rights. With a smile, senior Eurocrats say Mr Rompuy is a “very serious man” who will “examine it and study very thoroughly, taking his time”; in other words, the voting-rights issue was kicked into the long grass.

Even so, the bargaining went on into the early hours of this morning. Poland demanded recognition that the reform of its pension system be taken into account when assessing its debt levels. Britain insisted on support, even if only declaratory, for EU spending to be kept on a tight rein at a time when several countries are imposing budget cuts.

In the end, though, Mrs Merkel achieved her essential aim, while compromising on secondary issues. Moreover, she ensured that any amendment to the treaty would not touch Article 125 of the Lisbon treaty, the so-called “no bail-out clause”. Instead, a possible option might be to state elsewhere in the treaty that the article does not apply in exceptional circumstances, such as systemic threats to the euro zone's financial stability.

Most countries recognised that Mrs Merkel's political desire for a treaty-change decision was driven by a genuine worry that German's constitutional court would find the euro's temporary safety net illegal. Mrs Merkel admitted that the leaders' decision would “strengthen my position with the Karlsruhe court”. And without treaty change, she said, there would be “no legally valid” way of extending the temporary fund beyond 2013. The euro zone would then be vulnerable to becoming “a plaything in the hands of the markets”.

One of the most prominent dissenting voices was that of Jean-Claude Trichet, the president of the European Central Bank. He has been hawkish on the need for fiscal discipline, at one point complaining that the sanctions system was not tough enough. But at the summit, he is said to have warned leaders to be cautious in threatening to make creditors bear some of the cost of future bail-outs; that in itself could provoke a financial crisis, he said. He was slapped down by Nicolas Sarkozy, later endorsed by Mrs Merkel.

The German chancellor thus betrays an ambiguous attitude to the role of financial markets. She portrays her actions as an attempt to save the euro from the ravages of rich financiers and to make them pay the price of irresponsible lending. But she knows, too, that the markets, not voting rights or EU penalties, are the strongest sanction on wayward members of the euro zone. Ultimately, changing the treaty and setting up a crisis mechanism is meant to force markets better to price the risk of default by members of the euro zone.

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