Whatever Angela Wants, Angela Gets

Despite opposition from other European leaders, Angela Merkel got what she came for this weekend.

When European leaders met in Brussels last week to discuss the future management of the euro in wake of the fiscal crises that hit Ireland, Greece and other parts of Southern Europe this summer, their council was divided on the need of treaty reform. Whereas Chancellor Angela Merkel of Germany proposed to revise the Lisbon Treaty, other leaders were skeptical. But despite this opposition, Germany and its chancellor got their way.

With Germany’s economy booming again, Angela Merkel has emerged as the unofficial spokesperson of the austerity camp, opposing major financial injections into private industry and coping with a population still irritated with having to bail out Greece last May with a €750 billion support fund. In order to avoid similar ad hoc emergency measures in the future, European leaders agreed this weekend to create a permanent rescue mechanism for nations threatened with bankruptcy.

The European Commission had earlier proposed to sanction eurozone members that are in violation of the EU’s strict budget rules. Germany, along with its fellow proponents of austerity in Austria, the Czech Republic, the Netherlands and Scandinavia, initially supported this scheme only to submit to French demands for greater political control in return for President Nicolas Sarkozy’s backing on treaty reform two weeks ago. The French were hesitant to grant automatic sanctioning authority to the commission and demanded a greater say for national governments in the event that profligate countries must be punished.

Jean-Claude Trichet, the president of the European Central Bank, has been critical of this compromise, complaining that the sanctions regime isn’t tough enough. Frankfurt has consistently championed fiscal restraint. In a speech before the European Parliament in June, Trichet warned that “sanctions need to be applied earlier and must be broader in scope” lest European publics lost confidence in their institutions.

During the negotiations this weekend, the Germans also surrendered their proposition to temporarily strip countries of voting rights in case they persistently breach European financial codes. Smaller member states were particularly disinclined to being disenfranchised. Moreover such a treaty modification would probably have required to put the whole of the Lisbon Treaty to a vote in Ireland again where it took two referendums to get the people to accept it in the first place.

Even if the European Union has expanded to include 27 member states today, this latest episode demonstrates that in terms of decisionmaking at least, little has changed since the club first got together more than fifty years ago. When France and Germany agree on policy, there is virtually nothing that can stop them from implementing it.

European Council President Herman Van Rompuy is now supposed to prepare changes to the treaty that will allow the erection of a “crisis mechanism” before the temporary safety net expires in 2013.

Treaty modification does not address a more fundamental problem which The Economist stressed two months ago however: the huge loss of competitiveness which many European member states in the Mediterranean have suffered against Germany and the other more developed countries of the north.

This shows up in yawning imbalances inside the zone. Too many governments believed that, once in the euro, they could worry less about competitiveness. Actually, they should have worried more, because they have lost for ever the let-out of devaluation.

The southern countries must push through reforms in order to boost competitiveness — lowering corporate tax rates, decrease labor costs and prepare their pension and welfare regimes for the twenty-first century — but the burden cannot fall entirely on them, if only because it risks being hugely deflationary. Creating a permanent mechanism to avert sovereign default is a step in the right direction but it does not undo the basic intra-European economic imbalance that lies at the root of the crisis.