What Angela Merkel’s conversion to more euro-zone integration means for Europe

WHEN Germany and France disagree, everybody complains about paralysis in Europe. When they agree, the protest is about unacceptable diktats. So when Angela Merkel and Nicolas Sarkozy pushed an EU summit in Brussels to approve their “competitiveness pact”, which calls for closer co-ordination of economic policies among countries using the euro, an outcry was only to be expected. Yet its vehemence took them aback.

Over a long and bad-tempered lunch, almost every other EU leader railed against something. Ireland rejected the idea of aligning EU corporate taxes (or at least the tax base) as a danger to its low-tax growth model. Belgium and Luxembourg resisted calls to abolish their system of index-linked wages. The Baltics said they should not raise their pension age as fast as west Europeans because their people tend to die younger. Poland denounced plans for separate summits of euro-zone leaders for being divisive. From Stettin to Trieste, many easterners feel, a curtain is descending again. This time it bears the symbol of the euro.

Mrs Merkel and Mr Sarkozy should in part blame themselves. They chummily bargained for weeks and then leaked the pact’s details before telling their colleagues. The start of the summit on February 4th was delayed while the two conferred separately; lunch was then postponed while they gave a press conference to explain their plans. It was eventually left to Herman Van Rompuy, as president of the European Council, to find agreement in time for a special euro-zone summit in mid-March.

Whatever the details, one thing is clear: the EU is at a turning-point. The debt crisis is forcing the 17 euro-zone countries to pool economic sovereignty to a degree that was unthinkable before. And their relationship with the ten non-euro outsiders, ranging from eurosceptical Britain to east Europeans who are keen to join the single currency, has been thrown into doubt.

Mrs Merkel has invited all to join the competitiveness pact. She says it will complement, not replace, new mechanisms being created in Brussels: closer monitoring of national economic and budgetary policies; tougher sanctions to enforce fiscal rules; peer-review of budgets as part of the “European semester”; EU-wide economic guidelines called the annual growth survey; and the “Europe 2020” plan for structural reforms. “It’s like a Russian doll, a matryoshka doll,” commented Mrs Merkel. But the matryoshka image lends itself to another interpretation: of a union within a union. Mr Sarkozy is hailing the advent of European “economic government”. He has long cherished the notion of a euro-zone club, with its own summits, to regain some of the influence that France has lost in a bigger EU.

That is not quite what he will get. The European Commission (the EU’s civil service), disliked by both France and Germany, will keep a central role at the demand of smaller countries. There will be a euro-zone summit in March, but it will not for the time being be institutionalised, unlike the euro group of 17 finance ministers who meet (and pre-cook most decisions) a day before Ecofin gatherings of 27. Instead there are likely to be occasional summits (perhaps once or twice a year) of a “17-plus” group that includes countries ready to sign up to the competitiveness pact. This could grow to “27-minus”, with only the British and Czechs staying out.

In a different era, all this might have caused great worry in Britain and, as a result, generated even more tension within the EU. But the new British government, deeply hostile to further EU integration, seems content to stand aside even as the euro zone binds itself closer. If that means a two-speed Europe, so be it: Britain thinks its outer lane, presently inhabited by the likes of Poland and Sweden, is faster.

By tradition Germany is strongly pro-European, and by political preference it likes to operate at 27, a format that gives like-minded fiscal hawks and free-traders greater influence. By her own history, as a daughter of East Germany, Mrs Merkel is averse to division within Europe. Last summer, after the first phase of the euro crisis saw the rescue of Greece and the creation of a big temporary bail-out fund, the German chancellor rejected French demands for summit meetings at 17. But the second wave, in which Ireland was rescued and fresh doubts were raised about the size of the fund, has forced Mrs Merkel to shift.

Angela’s dilemma

Mrs Merkel will not allow the euro to collapse. But neither can she ask German voters to hand their credit cards to less disciplined countries. Her price for boosting the bail-out fund is thus a grand bargain, with the competitiveness pact at its heart. She wants members of the euro zone to abide by the example of the “best-performing countries” (ie, Germany), for example by adopting a constitutional or other domestic legal “debt brake”. Germany will make itself heard—at a time of crisis, the euro zone needs its biggest creditor. But to be followed, Germany still needs the support of France. Mrs Merkel has yielded to Mr Sarkozy on matters of form, even if the substance is mostly German.

For domestic reasons, both leaders want to show they can lead Europe, and even to dictate terms. Mrs Merkel must demonstrate she can impose rigour on profligate Mediterraneans. Mr Sarkozy hopes that standing with Mrs Merkel at the helm of Europe will allow him to remain in charge of France after the 2012 presidential election. And reforms to push back the danger of France losing its AAA credit rating will be easier if they are part of a great European project.

Some complaints from fellow Europeans may be a necessary part of saving the euro and leading its members towards greater integration. But if Mrs Merkel and Mr Sarkozy overplay their hand, they risk causing both resentment and paralysis. That would prolong the crisis to the detriment of all.