Olivier Douliery/Bloomberg
Merkel is still intent on preserving Germany's export business model Fabrizio Bensch/Reuters
Angela Merkel has no children of her own, but in the inner circles of her political party she is called Mutti—"Mom." The 55-year-old German chancellor has managed to stay in power since 2005 by governing quietly, cautiously, and pragmatically from the center right of a country that prizes smooth cooperation among big business, big labor, and big government. Although supersmart—she earned a doctorate in physics as a young woman in Communist East Germany—Merkel likes to pose as an ordinary citizen, comparing her economic policies to those of a provincial housewife who simply wants to balance the family budget. She and Germany are well suited to each other.
Now Merkel and Germany face a crisis, originating in dysfunctional Greece. As head of Europe's biggest economy and the country that has ladled out billions to support the European Union, she has emerged as the key player in the drive to save Greece from default, stem the bond market attacks on the euro, and instill fiscal discipline in the euro zone's weakest members. "There's no one else who can really match her power," says Roland Berger, a Merkel adviser and founder of Munich-based Roland Berger Strategy Consultants.
Yet Merkel is also hemmed in by circumstances. To understand this crisis it helps to understand the limits of the European monetary union. From the beginning, financial leaders such as European Central Bank President Jean-Claude Trichet have controlled the single currency but not the national budgets of member nations; the EU, in other words, has tools of monetary policy at its disposal but not fiscal policy. And the 1991 Maastricht Treaty, which tried to impose fiscal sanity by limiting national deficits to 3% of gross domestic product, has been routinely flouted, most egregiously by the Greeks.
Without a clear mechanism for a bailout, Merkel says Germany won't give a single euro to Athens until Greece shows backbone and cuts its budget. German voters approve of this stance: For years they've been enduring painful industrial restructuring as well as cuts in the German welfare state; they're not in a giving mood. Germany Inc. wants Merkel to support a stable euro as well and avoid costly bailouts or loans that could seriously damage confidence in the currency. Says Josef Ackermann, CEO of Deutsche Bank (DB): "The economic and monetary union was set up as a hard currency union, and acceptance of the euro by the German population would be seriously undermined if it were turned into a soft currency."
Germany has fought hard for a credible euro that enjoys global standing. More to the point, letting Greece's woes wreck the euro would hurt German business, which has built much of its strategy around the euro zone. "The euro has helped increase financial stability in Europe," says Jörg Schneider, chief financial officer of Munich Re, the giant reinsurer. "We've had no currency crises like we saw before."
Until now. That's why Merkel, thrifty as she is, may still have to fork out billions in German funds even if Greece manages only halting reforms. She doesn't want to cave in to the Greeks, but she also cannot afford to let the euro get so hammered by further attacks that Spain, Portugal, and Italy—the entire southern flank of the euro zone—slide into fiscal collapse as traders short their bonds the way they did Greece's. Even after the European Union pledged to support Greece, nervous investors are demanding four extra percentage points of yield to hold Greek bonds instead of safer German ones. "I don't think anybody would be extremely worried about Greece for Greece's sake. But we are all extremely worried about Greece for the euro's sake," says Kurt Lauk, president of the economic council of Merkel's party, the Christian Democratic Union.
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