Ahead of Key Euro Summit, Germany Losing Allies

Northern countries fear Berlin will succumb to French, Italian and Spanish pressure.

Ahead of a European Council summit on Thursday where leaders are scheduled to discuss plans for deeper economic integration, Chancellor Angela Merkel is losing support from countries that are typically considered German allies.

Although Northern European politicians are cautious not to stray too far from the German line, there is mounting concern in the Czech Republic, the Netherlands and Sweden that Merkel will succumb to French, Italian and Spanish pressure.

The Mediterranean countries have embraced plans drawn up by European Council president Herman Van Rompuy for a European banking union and the pooling of sovereign debt in the form of eurobonds. Merkel dismissed his proposals as “false and counterproductive” this week but only ruled out “shared total debt liability” which leaves the door open to European governments underwriting each other’s debt in part.

Dutch prime minister Mark Rutte, usually a stalwart German ally, has similarly ruled out eurobonds as a short-term solution to Europe’s debt woes but faces criticism from his Christian Democrat partners and opposition parties for disparaging plans for closer union at home while supporting Merkel’s push for “political union” in Berlin.

In parliament on Wednesday, Rutte argued that he supports political union to the extent that it enables the European Commission to interfere in the finances of high debt countries like Greece. But as opposition lawmakers were quick to point out, the Netherlands do not adhere to the 60 percent debt limit that is enshrined in the Stability and Growth Pact either. If there is closer union, the Dutch would have to surrender sovereignty as well which a majority of voters rejects according to opinion polls, three months before parliamentary elections are set to take place in the country.

Outside of the eurozone, the Czech Republic and Sweden, which support the German push for fiscal consolidation and market reforms in countries that have received bailouts, worry also. “We have to ask ourselves: is this just a way to get access to our resources, or does it bring some value added to Sweden?” Prime Minister Fredrik Reinfeldt wondered on Wednesday in reaction to Van Rompuy’s plans. “I think it is unclear.”

Czech prime minister Petr Nečas was equally blunt, saying he couldn’t accept any of the proposals.

As in the Netherlands, the right-wing Czech government and a majority of voters there is concerned that closer economic integration and political union will lead to a permanent bailing out of weaker European states in the periphery at their expense.

The Germans do not want what they call a “transfer union” either but Merkel seems willing to back a watered down version if the Southern European governments promise to advance entitlement and labor market reforms and liberalizations that are deemed necessary to improve their competitiveness relative to other economies in the currency union. Her allies fear that these reforms will be stalled if peripheral members are able to continue to mend their deficits at the expense of their stronger peers.