Chancellor Merkel's 'Defeat'? Methinks the Lady is Still in Charge

With an agreement being reached in the early hours of Friday, 29 June 2012 at the European Summit in Brussels over the Euro Crisis, my Mystic Meg clairvoyant award was cancelled. Don't care, I wasn't alone in getting the outcome - little or no change with platitudes - so very wrong. Typical of reporters was Ian Chua for Reuters in Sydney filing a report at just past midnight on Friday morning:

"The Euro hobbled along three-week lows in Asia as investors awaited more news from a summit of European leaders amid already diminished expectations that it will yield any concrete measures to tackle the debt crisis immediately."

Even though Mr Chua goes on to mention European Council President Herman Van Rompuy announcing a deal in principle on an infrastructure stimulation plan, this is not certain because:

"Behind the scenes though, officials said Italy and Spain had refused to sign off on a €120 billion ($149 billion) growth package until EU paymaster Germany approved short-term measures to ease their cost of credit."

At this 19th "crunch"/"crucial" Summit, Germany's Chancellor Angela Merkel, so recently the Brünnhilde shieldmaiden of Teutonic fiscal rectitude but now accused of a 180° U-turn in parts of the German media, bowed to the pressure exerted by all the other major Eurozone leaders and, apparently, that of the British and Americans behind the scenes. Early Friday morning and after 15 hours of gruelling discourse a "breakthrough" was reached by which Germany had agreed to ease its former very strict conditions on the disposal of "bail out" funds after both Italy's Mr Monti and Spain's Mr Rajoy had threatened to use their veto to block the stimulus package.

That was very bad form on the part of both leaders as, earlier in June they had congratulated newly elected President Hollande of France on his idea to counter the austerity measures currently in force by this stimulus package, worth about one per cent of European Union GDP, which he had promised to win for his supporters during his election campaign. Maybe a surprise to many, Chancellor Merkel thoroughly approved issuing a press release:

"I absolutely agree with what everyone else here has said - to devote one per cent of the GDP of the European area to growth, to efficiency and to investment."

"Here" was in Rome on 22 June and the "everyone else" was Mr Hollande, Mr Monti and Mr Rajoy. Surely they couldn't have forgotten! French good sense had prevailed to such a degree that Mrs Merkel decided to offer this tidbit to her opposition in the German parliament as an inducement to pass her Eurozone legislation, most of which - all the important parts that affect Germany's position in relation to other countries - require a two-thirds super-majority.

Over a barrel then, Mrs Merkel caved in bested by the leaders of Spain and Italy? Not really, for as Ben Chu in The Independent explained on 23 June: "The package is expected to be made up of accelerated spending of funds already in the European Union budget, as well as an increase in lending by the European Investment Bank."

Sounds like a very good bargain for Chancellor Merkel costing Germany practically nothing for getting her way in parliament!

Why then the victory celebrations in the Spanish and Italian press on Friday 29 June?

Firstly, the European Rescue Funds can be used to recapitalise the Spanish banks directly without going through the sovereign government, which would immediately show in Spain's National Debt, raising its Debt/GDP ratio and the likelihood of forcing up interest rates on the country's bonds. Coupled with this was an agreement that no party, like the European Central Bank, will in future enjoy seniority status and therefore be treated in exactly the same manner as private bond holders. This should encourage the purchase of Spanish bonds. This will apply solely to Spanish banks.

Mrs Merkel in return demanded an agreement that all the Eurozone's banks will join a "Banking Union" and fall under the direct supervision of the European Central Bank (ECB) in Frankfurt and although there is uncertainty just at the moment just what "all" encompasses this has been agreed and it is hoped that detailed proposals will be in place by the end of the year.

The second major "concession" is the possibility that once the European Stability Mechanism - the new organisation to be in charge of these funds, now increased to €700 billion - is in place, it will be allowed to buy Eurozone Members' bonds with the intention of helping to reduce borrowing costs. Assisted Member countries must meet their existing budget and reform targets in order to qualify.

This second deal was an acknowledgement that Mr Monti's (Italy) Government had pressed through the Italian parliament difficult tax, pension and employment reform legislation and there is little doubt that Mrs Merkel appreciated the very considerable pressure he was under - his resignation would have been most unsettling!

Mrs Merkel on her return to Berlin was able to pass all her proposals both for the current programme and January 2012's earlier agreements, through the two Houses of the German Parliament with large, comfortable majorities. In the real-world of politics she had given up trifles that have not cost Germany a penny whilst securing her plans for a tighter fiscal and political European Union under German rules and scrutiny knowing full-well that a break up of the Eurozone would be little short of catastrophe for us all.