London's financial district on May 25, 2010. World stock markets and the euro have tumbled on fears that Europe's debt crisis will cause a prolonged economic slump
A curious competition appears to be taking place within the European Union as leaders attempt to contain the euro crisis. Just two weeks after the E.U. agreed on a $1 trillion rescue package for ailing euro-zone members, Europe has launched a flurry of policy initiatives aimed at reining in the banks that are widely blamed for causing the economic downturn. But the measures are emerging from two power centers: the German government in Berlin and the European Commission in Brussels. And neither is ready to give way in the battle to shape post-crisis Europe.
On Wednesday, while U.S. Treasury Secretary Timothy Geithner was in London stressing the need for greater international cooperation to tackle Europe's financial troubles, the Commission unveiled plans to slap a new tax on banks across the E.U. The idea — which echoes the sweeping financial reform bill passed by the U.S. Senate on May 20 — is to funnel the proceeds into a fund aimed at managing bank failures in "an orderly way" and, so, preventing future financial crises.
But last week, Germany was the one making the grand announcements, unilaterally banning naked short selling, the speculative practice in which traders sell shares that they have not yet borrowed.
Brussels and Berlin have also competed on issues beyond banking, addressing wider questions of economic governance. On May 20, German Chancellor Angela Merkel called on E.U. governments to show greater budget discipline, including strict penalties for nations that break rules on debt and deficits. Yet a week earlier, it was the Commission taking a stand, with plans for E.U. countries to coordinate their national budgets for a peer review before going to national parliaments.
The cacophony of all these policy announcements was foreshadowed earlier this year in the E.U.'s tardy and chaotic response to the euro crisis, which culminated in the $1 trillion rescue deal for Greece and other vulnerable euro-zone countries. In the run-up to the agreement, Merkel held out for as long as possible while demanding that Athens accept stringent austerity measures before any bailout loans were released.
For many in Brussels, Merkel is showing alarming signs of Teutonic obstreperousness: increasingly vocal in her criticisms of the euro zone's profligate Mediterranean members, she is now vying with the Commission to set the E.U.'s economic agenda.
Officials bemoan the end of Germany's consensus-driven approach to Europe, which meant working in lockstep with other members, especially France. They fume over what they see as Germany's every-man-for-himself attitude. And they fear that Germany — fed up with picking up the tab for everyone else in the name of European solidarity — is now affirming its national interest and imposing its will on the rest of the E.U.
Jean Pisani-Ferry, director of Bruegel, a Brussels-based economic think tank, says the pummeling of the euro this year has been a sobering experience for Germany. "The euro crisis is definitely a shock for Germany: it is the nightmare scenario," he says. "But it does not mean Germany is withdrawing. It is simply no longer willing to accept anything in the name of European solidarity. It is becoming a more normal E.U. member state, defending its national interest like any other country."
Indeed, there are indications that Merkel's stridency is simply a continuum of Germany's twin, post-war strategic imperatives of sound money and European integration. "There is a more assertive German stance," says Thomas Fischer, head of the Brussels office of the Bertelsmann Stiftung. "But it was not caused by the euro crisis — it has been going on for much longer. And it does not represent a demand for less Europe, but for a different Europe." Fischer says the emphasis on ferocious budget discipline by the continent's most powerful nation and biggest net E.U. contributor is entirely consistent. "Above all, Germany wants to defend the stability of the euro," he says.
But some critics say Merkel has been digging in her heels for domestic purposes. Germany's former Foreign Minister Joschka Fischer has quipped that the Chancellor once hailed as Mrs. Europa seems to have reinvented herself into Frau Germania. Andrae Gaerber, who heads the Brussels office of the Friedrich Ebert Foundation policy institute, says Merkel's assertive rhetoric is about political expediency — and that it's just a phase. Over the past month, the Chancellor has faced two key ballots: the German Parliament vote last week on the $1 trillion rescue package and the regional election in North Rhine-Westphalia (which her party lost, thus losing its majority in the Bundesrat, or Upper House). "Now these votes are behind us, you will see a much more constructive Germany," Gaerber says.
Merkel also appears to have filled a policy vacuum. The euro crisis took Brussels officials by surprise — they had to virtually invent new rules day by day as they attempted to construct a credible response. The finance ministers of the 16 euro-zone countries hold regular meetings and can count on the European Central Bank to administer monetary policy, but they have few other institutional resources to lean on. An added complication is that the European Commission only began its latest five-year term of office in February and is still bedding in.
E.U. Economic and Monetary Policy Commissioner Olli Rehn says he recognizes the limits of the European method. "The E.U. has never had its Alexander Hamilton," he says. "It is a not a federal state but a consortium of nation states. But we still have to learn the lessons of the crisis, and I believe a coordinated European response is the best."
Merkel herself insists she is a good European. But by aggressively flexing her muscles, she has sent shock waves through the E.U. institutions that are used to seeing Germany as the perfect team player. And in Brussels, still shaken by the euro's woes, a pushy Germany is one drama officials feel they can do without.