What Does She Want?

I was speaking with a German friend at a European think tank a few days ago. He was swamped with press inquiries. “Journalists only want to know one thing,” he told me:  “What does Angela Merkel want?” I have often asked myself the same question. Of course, only the German Chancellor can really answer that question. But, based on my conversations with German officials and politicians, here are a few possible answers.

The German Chancellor has, of course, more than just one objective. Understandably, she wants to win another term in late 2013 when Germans go to the polls. She is a political animal, after all. At the same time, Merkel is trying to avoid going down in history as the woman who destroyed the euro and Europe. Last but not least, she would like to put her country and the continent (in particular the common currency) on a stronger footing, better equipped for the global challenges Europe and Germany are facing − both morally and economically. In her eyes, economic growth and morality are closely linked, which is why she politely resists the adoption of Anglo-Saxon solutions, such as solving a debt crisis by issuing more debt (which explains why American leverage in this crisis is close to zero).

Sometimes, Merkel’s objectives converge and she comes across as a strong leader on top of her game. In these instances, tactics designed to gain time, or to put it more bluntly, kick the can down the road, seem part of a well thought out strategy, which runs something like this:

-German financial solidarity comes in small doses. Well wrapped in a fog of nuance and complication, these interventions are easier to stomach for German voters, and they keep markets guessing.

-No government in the euro zone, particularly in the periphery, should feel safe from market pressure. Incentives for those governments to rein in spending and push reforms to regain competiveness outweigh inertia.

– Euro zone governments and institutions are pushed together by the crisis. The willingness to give up sovereignty (even in countries such as France or Spain) grows. In this scenario, the euro zone survives and becomes much more German. Merkel’s victory at the general elections in late 2013 is assured.

Unfortunately, with the situation in Spain worsening, her master plan is now in jeopardy. The botched attempt by European officials to calm markets with a bold announcement (recapitalizing Spanish banks with 100 billion Euros) fell flat when it became clear that no details had been worked out. Creditors feared they would eventually loose some or all of their money. It was a brutal wake up call. Merkel should now realize that the same market forces that she has tried to deploy as a tool to keep up the pressure on peripheral countries can also very quickly disrupt her overall strategy.

When her different goals threaten to pull her in opposite directions, the price for Merkel and Germany grows dramatically. It might include:

-More bailouts of member states and/or banks.

-A significant slowdown in global growth and a stuttering German economy in an election year. German voters would grow restless while financial markets push more countries (Spain, Italy, perhaps even France) to the brink. Pressure to provide more financial help would grow.

-Fragmentation outweighs the push for more integration. Overall, divergence trumps convergence.

Under this scenario, the euro enters a phase of acute danger of implosion. Merkel’s re-election prospects are jeopardized. Historians are poised to write about a new, dark chapter in the history of Europe, with Germany once again cast as the villain.

Those who observe Merkel these days see a woman, on the surface, in a serene mood, unruffled by the prevailing angst that the Euro might, after all, implode. Perhaps she still thinks that things are by and large moving in the right direction.

But perhaps she is only displaying calm because, when the storm hits, the centre needs to show that it holds.

The fact that the positive reaction to the Greek election results fizzled within hours, and that investors are now starting to ask for a premium to hold German “Bunds”, must be interpreted as a clear sign that Merkel’s original plan is no longer working. Markets are finally turning against the German Chancellor.

Change will come, either in the form of more integration and a partial mutualization of debt, or of a slow collapse of the European Monetary Union. Germany can still push the project forward. The EU could even become a role model. Or, Germany and its European partners could choose collective suicide.