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Merkel’s European moment

Leadership of the European Union from the beginning has fallen on Germany and France – Konrad Adenauer and Charles de Gaulle, Giscard d’Estaing and Helmut Schmidt, Helmut Kohl and Francois Mitterrand.

Now it is Angela Merkel and Nicolas Sarkozy, and at their last meeting they signaled that they are aware of the depth of the current crisis and are committed to keeping the euro alive. But is Germany up to the task?

Over the past 18 months, dealing with crises in Greece, Japan and Libya, Berlin has appeared evasive, absent, phlegmatic or unpredictable. We refused to deal with Greece’s insolvency until it became an existential European crisis; after the Fukushima nuclear crisis we panicked, and without consulting our neighbours, we closed down our nuclear power plants. We abstained in the UN vote on military action in Libya, abandoning our NATO allies. And it is Germany, which is again making the deepest cuts of any NATO ally to its defense budget.

In the past, calls for German EU ‘’leadership’’ have been code for getting Germany to pay – which we did willingly under past chancellors. But European unification is no longer a matter of war and peace, a moral imperative grown out of the two world wars of the 20^th century. German politicians of Merkel’s generation worry less about historic consciousness, are more inward-looking and tend to view NATO and the trans-Atlantic relationship as relics of the Cold War.

In this Germany, people resent being asked to spend their money to save the euro. We have a case: over the past 15 years, while the ‘Club Med’ countries of Greece, Portugal, Spain and Italy were enjoying a dolce vita with billions of EU-subsidies and cheap loans from their neighbours, we in Germany were going through a painful process of structural reforms, deregulation, high unemployment and stagnating wages in order to get our house in order. Now that our economics are sound, we are asked – pressured – to rescue prodigal neighbours.

Angela Merkel understands that she faces a risky rendezvous with Germany’s European destiny. With Euro-skepticism spreading to the Netherlands, Austria and Finland – not to mention her own Christian Democrats and their allies the Free Democrats – Merkel must lead an honest debate about Germany’s role in Europe.

Two weeks ago, she delivered her first pro-Europe speech to the German Parliament since she took office in 2005, rightly stressing that ‘’if the euro collapses, so does Europe,’’ and that ‘’Germany’s future is inseparable from Europe’s future.’’

But the speech fell short. First, Merkel should have pointed out that over the last six decades, no state has benefited more politically, economically and financially from the EU and from a strong and stable euro than Germany. If we punish our neighbours we punish ourselves.

Second, Merkel should have acknowledged that we helped make the mess that Europe is in today. As Gordon Brown wrote on these pages recently, the subprime crisis of 2007 was not solely an ‘’Anglo-Saxon’’ failure, as many European leaders still like to portray it, but also a failure of German and other continental banks. These banks were far more highly leveraged, more dependent on short-term wholesale funding and much more vulnerable than even American banks.

A collapse of the euro zone will have catastrophic reverberations from Beijing to Boston to Riyadh and back. All of Europe’s political and economic accomplishments of the last six decades will be rendered irrelevant. Europe has been and still is a role model for many people in the world. If it fails, the blame will be on Germany.

All eyes are on Berlin. There is a strong, if silent, expectation in European capitals – as in Washington – that Germany will not forget its historic obligation to those who helped it rise out of the ashes of World War II and reunite.

Merkel has shown that she and Sarkozy can move European affairs; both understand that this is a moment of truth for Europe. The time for extemporaneous solutions is running out. Only two choices remain: a breakup of the euro zone, or a closer European economic and fiscal union. If Europe cares to remain a global competitive player, the only option is more integration.

First and foremost, Merkel and Sarkozy can and should declare that the euro zone is in a ‘’state of emergency.’’ This would allow them to translate the stabilising measures they proposed at their last meeting in the Elyse – the creation of a common European economic and fiscal union – into effective multilateral action. This, in turn, would convince nervous financial markets that Berlin and Paris are serious about leading the process to finding, collectively, solutions to the EU’s debt crisis.

A serious common fiscal policy would include an EU finance minister, an idea that Jean-Claude Trichet, the president of the European Central Bank, proposed in May. Although this would require revising the Lisbon Treaty, a state of emergency would make it possible to take action immediately.

The new finance minister would have to be gifted and resolved to work with the European Central Bank and the European Monetary Fund (a successor to the European Financial Stabilisation Mechanism to be launched in 2013).

All euro zone countries will have to swallow a lot of German medicine; after all, we have done our fiscal homework best. This means enforcing a new effective stability culture, harmonising and monitoring fiscal discipline, requiring the 17 euro zone states to reduce deficits and write debt-brakes into their constitutions or national laws, and introducing strict sanctions mechanisms for those countries which fail to follow the new rules. Germany will only agree to the introduction of euro-bonds to spread the responsibility for government debt across the euro zone if sinning countries can be punished – for example by losing certain EU subsidies or voting rights.

Crises create opportunities for radical change, and courageous leaders can transform those crises into change. Merkel must exert strong and courageous leadership if she wants to write and not exit European history. This ‘’to-be-or-not-to-be’’ moment is a unique chance to finalise Europe’s integration.

Margarita Mathiopoulos is a professor of US foreign policy at the University of Potsdam and chairwoman of the Trans-Atlantic Forum of the Free Democratic Party