News reports from Germany this morning suggest that faced with the stark alternatives of a breakdown in the eurozone and the flotation of “eurobonds”, euro-denominated bonds that would be jointly backed by all of the members of the zone, Angela Merkel’s Christian Democrats are slowly and reluctantly edging toward some form of “transfer union” in which Germany would become responsible for the debts of weaker countries like Italy and Greece. Her Free Democrat coalition partners aren’t so sure; the idea of a transfer union is about as popular in Germany as a US guarantee of Mexican and Argentine debt would be here.Nobody knows how this will end up; Europe is on the verge of the biggest decisions since the original Treaty of Rome established what grew into the European Union back in 1957.The French have played this very cleverly. The euro is what German chancellor Helmut Kohl promised France as a kind of compensation when German unification wrecked decades of French policy aimed at ensuring French leadership in Europe. The common currency would bind Germany into a European framework and limit united Germany’s power in Europe. France hopes to use this crisis to commit Germany more fully and decisively to the euro and harness the German ox to the European cart.France’s clear short term goal is to commit Germany to underwrite debts from weak EU states. That not only staves off a crisis that threatens to engulf France; by putting Germany on as a co-signer for Greek, Italian and Spanish loans, France will ensure that Germany’s credit rating will not be better than France’s.The French will accept almost any German rules to limit the ability of countries like Greece to run up new debts. It is in France’s interest to have the weak EU countries on a fiscal leash — and better still to do it in such a way that the Greeks and others will blame Germany for the austerity. Once the new system is in place, France will subtly and continuously work to loosen and politicize the rules, heading a “soft money” group within the bloc. Over time, they believe (probably correctly) that they can soften the economic rules, pushing the Germans to offer more and more generous terms and make the system more “political” and less rule-driven.It is a very elegant and very typical French trap. Having trapped President Obama into supporting French neo-colonialism in North Africa under the guise of a humanitarian war in Libya, the French are on a roll. What makes the euro trap so clever is that in fact Germany’s best choice may be to go along with French plans.Keep your eyes on Europe. One way or another, history is being made there this year.
Tip Toe Towards Transfer Union?