'Merkozy' starts to creak at seams in Euro zone crisis

BERLIN // The leaders of France and Germany insisted yesterday that their plans to rescue the euro were on track as the debt crisis returned with a vengeance after a brief respite, with fresh doubts about Greece's ability to avert bankruptcy.

Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, were as intent as ever on showing a common front, and papered over their differences regarding the introduction of a planned financial transactions tax at their summit in Berlin.

"There is no future for Europe if Germany and France don't agree," Mr Sarkozy said at a joint news conference after the meeting.

"Merkozy", as the two leaders are dubbed in the European media, were confident that binding rules enshrining budget discipline and debt reduction in a "fiscal compact" agreed last month could be signed soon, possibly before the end of January, by 26 of the 27 EU members, excluding Britain, which refused to join the agreement.

"There is a good chance that we can already sign the debt brakes and everything that that entails in January, in March at the latest," said Mrs Merkel.

"I think Germany and France have made a decisive contribution to that."

The two leaders also said they would submit joint proposals for boosting economic growth and employment in the euro zone ahead of the next EU summit on January 30.

Their meeting was overshadowed by a slide in the euro to below US$1.27 (Dh4.66), its lowest level since September 2010, amid concern that Greece may not be able to restructure its debts in time to avert a debt default looming in March.

If it does default the Greece could be forced to leave the euro zone and devalue its currency to stay afloat.

Analysts have said Greece may need an even bigger debt writedown and more financial aid than agreed so far because it is making slow progress on budget cuts and its recession is far worse than predicted.

There are also worries about whether Italy will be able to refinance its debts at lower interest rates in the coming months.

However, despite the show of unity with Mr Sarkozy, Mrs Merkel is looking increasingly isolated in Europe with her mantra about the need for fiscal discipline.

While many euro countries are sliding into recession and struggling to cut their budgets, the German economy is doing so well that she is even contemplating tax cuts.

The economic divergence is threatening to drive a wedge between Germany and its closest partner France, which is weighed down by slowing growth and high unemployment.

France also faces the loss of its treasured Triple-A credit rating because of its slowing economy, high debt and the exposure of its banks to other ailing euro states.

Mr Sarkozy, up for re-election in April, is expected to place a greater emphasis on growth than on belt-tightening in tackling the euro crisis, which could put him at odds with Mrs Merkel. He already irked her by unilaterally announcing a plan last week to introduce a tax on financial transactions in France rather than wait for the rest of the EU to launch it.

Berlin wants the tax, aimed at making banks cover part of the cost of financial crises, to be introduced across the EU, or, failing that, among the 17 countries that use the euro, as Britain is resisting the move fearing it would damage London's financial centre.

In his bid to show leadership in the crisis, Mr Sarkozy is "trampling on the much-vaunted coordination between Paris and Berlin", the online edition of Der Spiegel, Germany's leading news magazine, wrote yesterday.

But few in Europe have any doubt that Mrs Merkel is the senior partner in the Franco-German axis that has been the driving force behind European integration.

Germany's main public television channel, ARD, parodied their relationship in a recent comedy sketch in which Mr Sarkozy was portrayed as a hapless butler serving Mrs Merkel, the lady of the manor, at a banquet.

"Get on with it," she tells him as he stands obediently by her side, "or your AAA rating will only apply to your watered-down champagne."

"You look richer than ever," Mr Sarkozy says sycophantically, raising his glass in a toast. "To the euro, Mistress!"

Germany's leadership in the euro crisis has stoked old fears of its domination in Europe, with British commentators accusing Germany of seeking a "Fourth Reich" and Greek demonstrators holding up placards of Mrs Merkel dressed as a Nazi. France's leading newspaper, Le Monde, has said fears of a "German Europe" are growing in France.

Germany is keenly aware of Europe's suspicions. Some in Mrs Merkel's party appear to be savouring its influence. Volker Kauder, her conservative parliamentary group leader, said in November that "Europe is speaking German" in reference to other nations adopting German budget rigour.

Other Germans are aghast at the nation's new role. Helmut Schmidt, 93, chancellor of West Germany between 1974 and 1982, warned last month that Germany should remember the suffering it caused its neighbours in the 20th century, and accused the government of "nationalist German muscle-flexing".

"We Germans aren't sufficiently aware that almost all of our neighbours still have latent suspicions towards the Germans which will probably linger for many generations," Mr Schmidt said.

"If we allow ourselves to be seduced into claiming a leadership role or at least play First Among Equals, an increasing majority of our neighbours will resist that."

Other commentators say the time has come for Germany to show the political leadership that befits its economic might.

The country could no longer afford to maintain the low profile it kept on the world stage for decades when it was cowed by guilt over the Second World War and was content to be an "economic giant and a political dwarf" wrote Cicero, a German political magazine, last week.

"Democratic Germany has grown up and must prove itself, together with France, as the decisive force in Europe's existential crisis," Cicero wrote. If Germany failed to live up to its role, it would be behaving like an "opportunist hypocrite unwilling to shoulder responsibility".