ANGELA MERKEL, the German chancellor—and also, in effect, the euro area’s boss—has always insisted that she wants to preserve the euro area in its current form. But as the euro crisis intensifies and the potential bills for Germany mount, she would be imprudent not to be considering a Plan B. Drafted in utmost secrecy by a few trusted officials for the chancellor’s eyes only, this is what the memorandum outlining a contingency plan might say.
THE CURRENT IMPASSE
I. Since the euro crisis started over two years ago you have said that Germany will defend the single currency, based on your conviction, shared by business and the political class, that its survival is in our national interest. To that end Germany has pledged large amounts of public money, both in our contributions to various rescue funds and through the Bundesbank’s share of risks taken by the European Central Bank (ECB). At the same time you have tried to minimise the bill for German taxpayers by insisting that bailed-out states implement strict austerity programmes and, more generally, by resisting calls for debt mutualisation—code for Germany underwriting the euro area—while demanding greater central control over all national budgets.
II. Bluntly, the plan isn’t working. Greece is a disaster zone. Ireland and Portugal are making some progress (it was encouraging that Ireland was able to raise some money from the markets in July) but they still have a long way to go and could easily be knocked off course. Worse, Spain looks as if it may need a full bail-out rather than the partial one for its banks you had hoped would suffice. And Spanish sickness is infecting Italy, undermining all the good work that Mario Monti has been doing since the Italians saw sense and got rid of Silvio Berlusconi, as you had been urging behind the scenes. Meanwhile François Hollande isn’t doing enough to get France into shape and is playing the usual French game of calling for Germany to do more while resisting your attempts to centralise control at the European level. Mario Draghi, the ECB’s president, has calmed things down for the moment, but his plan could easily come unstuck.
III. The position is dangerously unstable. If capital flight from the peripheral economies gathers pace, it could trigger runs on entire banking systems. That would put the ECB—and thus, indirectly, the Bundesbank and Germany—on the hook for deposits worth trillions of euros. The domestic politics are already ugly in several countries, notably Greece. This is poisoning our position in southern Europe, where our help is increasingly seen as a new form of German tutelage. The situation is deteriorating in Germany, too, where your ability to act is being limited by a backlash against bail-outs and against the euro itself. If anything, the backlash in Finland and the Netherlands is even more vicious.