The masks have fallen. From now on, we will all be living in a more German Europe, with economic policy driven by Berlin's hair-shirt export-or-die model. That is the lesson of a deal among eurozone leaders on a financial safety net for debt-stricken Greece, adopted largely on German conditions on Thursday after months of wrangling that battered confidence in the single European currency.
"The politics of the EU are undergoing a fundamental change at present, with Germany becoming increasingly willing to cast off the shackles of the past and make its voice heard," said RBS analyst Timothy Ash in a research note. Chancellor Angela Merkel accepted a last resort rescue plan for eurozone states in distress after winning her key demands - a role for the International Monetary Fund in the euro area, a pledge of tougher European Union budget rules and no loans to Greece until it is close to drowning.
She swatted any move to issue eurozone government bonds jointly or to question Berlin's own role in the eurozone's economic imbalances, about which the German political class is united in denial.
"This will ultimately lead to German political and financial hegemony without sublimation," said Ulrike Guerot of the European Council on Foreign Relations. "For years, we have run Europe from behind the scenes, but we gave the ownership to the European Commission, to France and the smaller countries." In the tradition of EU leadership, it was euro co-founders France and Germany who negotiated the compromise on Greece that was then ratified by the other 14 eurozone members, and eventually by the whole 27-nation EU.
But the inequality between Paris and Berlin has rarely been more glaring. France made most of the concessions to convince Merkel not even to open her chequebook but at least to agree to show it. French President Nicolas Sarkozy had opposed any role for the IMF in the eurozone, seen as a political humiliation and a dangerous precedent giving the Washington-based global lender a toehold in the euro family.
"Giving a 'droit de regard' (look-in) in the eurozone to an institution in which the Anglo-Saxons (the United States and Britain) have a veto was not on our initial agenda," a French official said. He added that Paris had negotiated hard to keep the IMF to a minority, subordinate role in any rescue.
France can also claim to have quietly disposed of the most radical German demand to change the EU treaty to make it possible to expel a repeat offender from the eurozone. Sarkozy resisted the temptation to argue in public with Merkel when she put forward such ideas, aware that she faces huge public opposition to any bailout for Greece ahead of a difficult regional election in May in which her centre-right coalition's upper house majority is at stake.
Merkel's domestic weakness may have made her more assertive in Brussels and others more willing to accommodate her. EU diplomats said European Commission President Jose Manuel Barroso also played a key role in brokering the compromise, warning publicly of the risks to the euro's stability at a time when Merkel was rejecting any assistance for Greece.
Germany is Europe's largest economy and would be the biggest contributor - with 28 percent - to any bailout. When French Economy Minister Christine Lagarde suggested the Germans could boost domestic consumption instead of focusing on exporting more to eurozone partners and the world, she was slapped down by German ministers with sporting metaphors.
Finance Minister Wolfgang Schaeuble said it was like asking Bayern Munich soccer team to play less well. Economics Minister Rainer Bruederle said it was like telling a champion sprinter to put lead in his shorts. They invited other eurozone countries to follow Berlin's example and cut their labour and welfare costs to make their economies more competitive and export more.
The idea that German surpluses had a hand in Greek or Spanish deficits was anathema. "The Germans are all in denial. They still believe that the German virtues of austerity, wage restraint and hard work are going to work, economically, financially and politically. If you question this in Germany, you get killed," Guerot said.
French calls for an "economic government of Europe" to co-ordinate economic and fiscal policies in the eurozone won only a passing reference in the French text of the agreement. To assuage German and British opposition to central economic planning, the English version said "governance" rather than "government" and the German word was "Steuerung" (steering).
Britain and Poland were irritated that decisions affecting the continent's future, including on EU budget discipline, were being taken by the 16 eurozone leaders while they were in the dark, waiting outside the room. Even those inside the meeting had little option but to accept Germany's conditions for a fallback mechanism to protect the eurozone against a possible sovereign default. "Next time we might as well just phone to find out what's been agreed by France and Germany," one EU diplomat said.
Countries with big deficits or debts such as Portugal, Ireland, Spain, Italy and France were aware that markets might attack their debt next if there was no rescue plan for Greece. For those outside the eurozone or the EU, the outcome could be a two-class Europe in which an inner core, under strong German influence, increasingly calls the shots. "In general, the travails of Greece will mean that the EU/ECB/European Commission will tend to be much tougher in terms of imposing conditionality, whether that is for new entrants to the eurozone or to the EU, such as Turkey," RBS's Ash said.
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