Q+A-What is behind Merkel’s euro zone strategy?

Q+A-What is behind Merkel’s euro zone strategy?
# 19 March 2010 00:07 (UTC +04:00)
Baku – APA. German Chancellor Angela Merkel has become the first European leader to explicitly call for a change in EU rules to allow states that repeatedly break the bloc’s economic guidelines to be expelled from the eurozone, APA reports quoting “Reuters”.
Her comments are likely to provoke debate as the subject had been taboo until Finance Minister Wolfgang Schaeuble floated the idea last week by saying steps should be introduced to allow states to leave the euro zone in extreme cases. Here are some questions and answers on what Merkel’s strategy is on the euro zone and what lies behind it.
* It is unlikely that Merkel, or indeed Schaeuble who first raised the idea, wants any member to give up the single currency. That would be a major blow to the euro zone and could even signal the start of its collapse.
* Rather, they view the option of an expulsion as a threat to instil more long-term fiscal discipline into euro zone members. That is, in Merkel’s view, the only way to avoid future crises and stop this one from spiralling out of control.
Schaeuble also linked the idea of letting a member leave the euro zone in extreme cases to the long-term notion of a European Monetary Fund, which could provide emergency aid to members.
* Under current rules, kicking out a euro zone member does not seem possible. Such a move would require a change in the Lisbon Treaty which incorporates the provisions enshrined in the Maastricht Treaty. Although the Lisbon Treaty includes an exit clause enabling a state to elect to leave the EU, it is unclear what would happen to that state’s euro membership.
* There is little appetite for revisiting the Lisbon Treaty, which took years of wrangling to push through in all 27 members of the EU and only came into force last December. Any changes could be complex and finding consensus would be a big challenge.
* Worry about wider crisis in long term
The EMF and the possibility of expelling a euro zone state are essentially Merkel’s ideas for a long-term strategy to get euro zone members to have tougher budget discipline.
The government sees these as the best mechanisms to prevent a wider crisis and avoid endless bailouts of euro zone states.
Merkel also knows German financial markets and voters would not accept a bailout for Greece or another state. The public would view a bailout as opening the floodgates to other requests for aid and even as the beginning of the end of the euro zone, a scenario the German government wants to avoid at all costs.
Merkel, who has repeatedly warned the euro is facing a difficult phase, has realised the dual pillars of the euro zone -- the no-bailout clause and the Stability and Growth Pact -- may not be sufficient. After all, when the system was devised, noone was thinking about the possible default of a member state.
* Domestic politics
Merkel also needed to widen the debate about aid for Greece to include the whole euro zone after intense speculation in the last few weeks about whether and how Europe’s biggest economy and traditionally the EU’s paymaster general, would help Greece.
Keenly aware of voters’ strong opposition to any bilateral aid for Athens, Merkel wants to make this debt crisis a euro zone, not exclusively German, problem.
Public opinion is especially important to Merkel in the run-up to an election battle on May 9 in Germany’s most populous state -- North Rhine-Westphalia which looks set to be tight.
* Fear of legal challenges if bailout needed
Merkel also believes Germany could face major legal obstacles if it were to give aid to another euro zone country.
Germany has less room for manoeuvre than some other EU members on the Lisbon Treaty after a German Constitutional Court ruling last year handed more powers of scrutiny of EU business to the German parliament. Only "a serious threat to the well-being of the German people", can justify providing money to Greece, argue government experts.
It is unclear exactly what that threat would be but it may be something like an imminent shock to the whole euro zone.
* Although any change in the rules required for expulsions is likely to take too long to apply to Greece, the debate has been triggered by the debt crisis there. As the euro remains under pressure and market jitters continue, the need for action from euro zone states to prevent contagion becomes more urgent.
* In political terms, the vote in North Rhine-Westphalia is drawing near. The last thing Merkel wants is to have to hand Athens aid just before that vote, her first electoral test since her centre-right coalition took office nearly five months ago. Polls show her coalition in the state is set to lose power and that would be a major political blow and also rob her of the control of the Bundesrat upper house of parliament.
- Opinion polls show Germans are increasingly worried about the future of the euro and against that background the threat of expelling "repeat offenders" to save the long-term future of the currency goes down well among Germans. Voters here are especially loathe to help Greeks because they think they have been cooking the books for years.
- The reluctance to fork out aid is fuelled by long-standing fears among Germans that letting Mediterranean countries, like Italy and Greece, into the euro zone would undermine the currency’s stability. For decades after World War Two, Germans worked hard to achieve stability for their deutsche Mark and they do not see why they should be punished for another nation’s carelessness or recklessness.