Did Merkel Win or Lose?

Everyone on the euro Titanic was relieved that the ship's sinking could once again be postponed

by Pater Tenebrarum

It was interesting to read two articles in German news magazine 'Der Spiegel' that appeared to take completely opposing views on this particular matter.

One article considered her the clear loser of the summit, suffering a 'painful defeat'. 

“It is a painful defeat for Merkel. With the German parliament set to approve the ESM and the fiscal pact on Friday evening, Merkel had been eager to avoid making concessions to the southern Europeans. On the eve of the summit, the chancellor's advisers had ruled out the possibility of easing the rules governing access to the ESM. In particular, Merkel considered IMF oversight of aid recipients to be non-negotiable.

Now, however, she will travel in defeat back to Berlin, where she is scheduled to address the German parliament in the afternoon. Merkel's confidants began trying to put a positive spin on the summit results early on Friday morning. The chancellor had pushed through her maxim of "no liability without oversight," said Hermann Gröhe, general secretary of Merkel's Christian Democrats, in an interview on German breakfast television. Direct ESM aid to banks will only be allowed, he said, once the oversight authority is established at the ECB.

From the German perspective, however, that is but a small consolation. Mediterranean countries, for their part, can celebrate a breakthrough. The euro zone's "mental block" has been broken, Monti exulted, adding that he was very satisfied with the agreement. His negotiating tactic — which involved holding up agreement on the European Union growth pact until his other demands had been met — proved to be "objectively very useful," the Italian prime minister added.  

Another article in the same magazine declared Merkel the 'tactical winner' – asserting that she only gave up positions that were 'untenable anyway', with the object of securing more important big picture gains. 

“In the run up to the summit, Germany had ceaselessly repeated its "no shared liability without shared oversight" maxim. As such, the two core decisions made in Brussels look like a clear defeat for Merkel. In fact, however, the chancellor didn't abandon any position that hadn't already become untenable. And with the fiscal pact and the growth pact, she has received a pair of important trade-offs.

After all, it really makes no sense to loan Spain cheap money to save its banks when doing so only increases the country's sovereign debt load and drives up the rates Madrid must pay for issuing new debt. Plus, the terms of the agreement also state that aid will only begin flowing to the banks once an effective European banking supervision mechanism, under the auspices of the ECB, has been put in place. That will take some time.

When it comes to oversight, the example of Greece shows that even strict and detailed austerity measures don't help truly ailing states when they lack the will and ability to implement them.

If the ratification process goes smoothly, the fiscal pact will grant Merkel the tool she needs to impose strict austerity measures on highly indebted states. Like Germany, Italy must in the future make ends meet without accruing new debt. In 2011, Italy's budget deficit amounted to 3.9 percent of gross domestic product. In addition, Italy will have to quickly reduce its overall debt by half, from 120 percent to 60 percent of GDP. It is a monumental task, but Italy will only be able to receive cheap money from the ESM once this task has been accomplished.

No troika in Rome could ever have pushed through such a drastic austerity diktat.

It is also clear to Merkel that she can do no better in the euro crisis than prime ministers Mario Monti in Rome and Mariano Rajoy in Madrid. Both have pushed through far-reaching reforms, to the point that they have come under strong domestic resistance. In Italy, elections are scheduled for next spring. As such, it was vital that Merkel allow Monti to land a punch or two.

Merkel's concession is more than compensated for by a diplomatic victory she scored in the run-up to the summit: Late last week, she managed to get new French President François Hollande to sign off on her fiscal pact, which is deeply unpopular in Paris, in return for her support on the €130 billion ($165 billion) European Union "growth pact."

The inequality of the deal is difficult to overstate. The growth pact is made up of little more than empty promises and dreams that can never come true. Though it won't spur any growth in Europe, at least it won't cost Germans any more money either.

Should one be looking for a summit loser, in fact, it necessary to look no further than Hollande. Not Angela Merkel. She merely did what she always does on the EU stage. She made compromises. And pretty clever ones at that.´” (emphasis added)

Getting Hollande to sign the fiscal compact in return for the ineffectual €130 billion 'stimulus' pact is indeed a bit of a coup. If memory serves, a very similar deal was once concluded between Helmut Kohl and France's then prime minister, the socialist Lionel Jospin. What isn't remembered of that deal is its 'growth pact' component. What is remembered is that the ECB's statutes were ultimately modeled after the Bundesbank's.

It is probably true that some of the positions Germany insisted it could not compromise on had become untenable for practical reasons – the risk of the crisis careening toward a swift and ignominious finale was quite pronounced ahead of the summit. In hindsight we still think that the pre-summit posturing mainly served to lower expectations in order to have the summit produce the biggest bang for the buck, so to speak.

It is ironic that the biggest winner so far seems to have been the OPEC cartel, but surely everyone on the euro Titanic was relieved that the ship's sinking could once again be postponed. Spanish and Italian yields have retreated below previously broken resistance levels and peripheral stock markets have vaulted higher, in the process bringing some distance between their current levels and the 2009 lows that have only very recently threatened to give way.

It remains to be seen how long the happy hour will last. One thing the German side has always been right about is that any postponement of difficult political decisions regarding economic restructuring will make for an even more difficult situation at a later date. The illusion that economies in trouble can be 'fixed' with bailouts and the printing press is going to prove to be untenable in the long term.

If the euro area wants to return to a path of sustainable economic growth, a lot of work remains to be done – and while the summit has relieved some of the immediate market pressure that threatened to derail the euro project in the near future, the concessions made by Germany may well have rendered an even more catastrophic failure in the more distant future more certain.

We were already wondering why the reported threat by Mario Monti and Mariano Rajoy to 'hold up the growth pact' at the summit apparently enabled them to wrangle concessions from Mrs. Merkel. This seemed rather absurd to us on the face of it. Germany could just as well have told them to forget about the growth pact after all. It turns out the the German social democrats, under the tutelage of the eurocratic whiner-in-chief Martin Schulz (president of the European parliament) had made the 'growth pact' a condition for their support of the ESM ratification vote on Friday afternoon. As CSU general secretary Alexander Dobrindt put it:  

“By making the growth pact a condition of their approval of the ESM in the Bundestag, the SPD and the Greens exposed the German chancellor to extortion in Brussels," he [Dobrindt, ed.] says. "The SPD and the Greens betrayed German interests.”

As the same report in Der Spiegel from Monday that contains the Dobrindt quote notes, echoing our sentiments expressed above: 

“This [ESM bond buying without strict austerity conditions attached, ed.] sends a devastating message to the crisis-ridden countries: There is no point in taking more reform measures than absolutely necessary. "It is unacceptable that large countries like Spain and Italy must satisfy fewer reform requirements than small countries like Portugal and Ireland," says Michael Hüther, director of the Cologne Institute for Economic Research. There is every indication that the countries that have already received bailouts, most of all Greece, will soon demand an easing of their austerity conditions.” (emphasis added)

Indeed. Nothing that was decided at this summit is in reality cause for celebration. Economic reform, the only path to regaining competitiveness and sound economic growth, has been 'kicked down the road' with what will likely be very regrettable long term consequences.