Merkel does not deserve 'Iron Chancellor' epithet

The German leader Angela Merkel must have been quite pleased with her epithet after last week's EU summit. She needn't be. The chance for real advances went begging.

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BERLIN //After last week's EU summit, the German chancellor Angela Merkel does not deserve the epithet "Iron Chancellor" some commentators have given her.

True, Mrs Merkel came home with an agreement that should spare her a major domestic political headache. But she failed to secure backing for several key changes that would have made the single currency significantly more protected against storms.

Financial markets are understandably unimpressed, as an increase in risk premiums on the sovereign debt of ailing economies such as Greece and Ireland showed on Friday.

Mrs Merkel managed to strong-arm fellow leaders at the two-day meeting in Brussels into giving tentative backing for something most of them had been bitterly opposed to - a change in the wording of the Lisbon EU treaty to provide a permanent mechanism for handling future debt crises once the existing €440 billion (Dh2.26 trillion) safety net expires in mid-2013.

While everyone agrees the EU needs a permanent rescue scheme, the German demand for a treaty amendment means more arduous national ratification procedures and even referendums in some countries including Ireland, which had rejected the Lisbon Treaty in 2008.

The treaty, which streamlines decision making in the EU after its expansion to 27 members in 2004, only came into force last December after eight years of negotiation.

Mrs Merkel desperately needs the amendment to assuage the German constitutional court, which is due to rule on the legality of Berlin's contribution to the euro rescue fund, hastily arranged in May to fend off speculators on the single currency after Greece almost went bankrupt.

With a permanent, legally binding mechanism in place, she will not have to negotiate the extension of the safety net - a deeply unpopular measure in Germany where voters are incensed at having had to bail out high-debt nations - in 2013. Mrs Merkel faces a general election that year.

The treaty amendment would also provide the legal foundation for forcing private-sector bondholders to be involved in future bailouts, another German demand.

Herman Van Rompuy, the president of the European Council, will now sound out possibilities for an amendment that will be small enough to avoid a full round of ratifications and referendums. Mr Van Rompuy will report back at the EU summit in December.

Job done, Mrs Merkel, a master at side-stepping political mines, would have thought as she flew back to Berlin on Friday.

Not so. To achieve her goal, the "Iron Chancellor" went soft on the reform of the Stability Pact, the agreement designed to ensure fiscal discipline and thereby underpin the stability of the currency.

Two weeks before the summit, Mrs Merkel had procured the support of Nicolas Sarkozy, the French president, for a treaty change by dropping her demand for a quasi-automatic system of penalties on nations that persistently exceed the budget deficit ceiling of 3 per cent of GDP.

That means it will remain up to the EU's political leaders to decide who gets fined. So far, in the 13 years since the pact came into force, no country has ever been punished, even though the deficit limits have been breached dozens of times. Nations always managed to talk their way out of that painful trip to the headmaster.

So even though the EU summit endorsed plans by the European Commission, the bloc's executive body, for tougher budget rules the likelihood they will be rigorously applied remains slim.

Mrs Merkel also failed to get support for her demand that deficit wrongdoers should have their EU voting rights suspended.

For the moment, despite the evident lack of progress on the Stability Pact, the euro remains strong largely because Germany, by far the biggest economy in the EU, is booming.

But the strength of the currency is making life harder for exporters in troubled economies such as Greece and Portugal, and thereby threatens to widen economic imbalances within the 16-nation euro zone.

Last week's summit was an example of classic EU horse-trading. Investors would be foolish to believe the leaders' claims that significant progress has been made in protecting the single currency.