Insight - Germany's Merkel - a fate tied to the euro
BERLIN (Reuters) - Angela Merkel sat calmly as, one after another, disgruntled members of her conservative party stepped up to the microphone and attacked her for mismanaging the euro zone debt crisis.
After listening for close to an hour, she rose, walked across stage to the podium, peered out at her critics, and warned them gently about the consequences if Germany failed to live up to its European responsibilities.
"Fate has given us this challenge," the German chancellor told the audience of about one thousand gathered on October 4 in a drab hotel conference room in the eastern city of Magdeburg.
"And now we need to do our best to rise to it. It is a historic challenge. If we don't get a grip on this, it will have repercussions well beyond the next election. I have no doubts about that."
Two years into a deepening crisis that is threatening to tear the 17-nation euro area apart and plunge the western world back into recession, the leader of Europe's biggest economy finds herself under more pressure than at any point in her 20-year political career.
Many traditional allies in her Christian Democratic Union (CDU) and center-right coalition believe she has gone too far in bankrolling multi-billion euro rescues for profligate countries like Greece, and worry that the burden for German taxpayers will only grow and grow.
In other European countries, and foreign capitals from Washington to Beijing, the view is that Merkel has not done enough to shore up the euro zone. She has been criticized as indecisive, reactive, and too focused on her own political future to take the bold steps needed to stem the crisis.
Just last month, some observers in Germany were predicting that her government would collapse prematurely, a victim of deepening divisions over euro zone policy.
But her hard fought victory in a parliamentary vote last month on expanding the euro zone's rescue fund, and her forceful appearance in Magdeburg last week -- one of six regional conferences she hosted in recent weeks to explain her euro policy to local CDU officials -- showed Merkel will not go down without a fight.
People close to the chancellor who spoke to Reuters on condition of anonymity, say she has come to realize over the past months that her own fate has become inextricably linked to the fate of the euro zone itself.
Along with this realization has come a clear shift in her rhetoric. In the series of regional conferences, she discarded the attacks on spendthrift Greeks that dominated her speeches for much of the past year in favor of carefully worded arguments on why Germany must help.
"If the euro fails, then Europe fails," is a line she has used repeatedly in recent weeks. What is left unsaid, is that a failure of the euro would also be a disaster for Merkel, dooming her chances of winning a coveted third term in 2013.
"She has slowly come to realize that the euro zone crisis is the biggest challenge of her political career," said a senior CDU lawmaker who is close to the chancellor. "Over the summer, she changed her rhetoric and is now calling for more Europe, treaty changes, more economic governance. This is a sign of her commitment."
"What she hasn't done is give a big Churchill-type speech about Europe," the lawmaker said. "But that's no surprise. She has shied away from big speeches, from the theatrical side of politics, for her entire career."
BIGGEST TEST YET
Since ousting Gerhard Schroeder in 2005 to become Germany's first woman chancellor, the Lutheran pastor's daughter from communist East Germany has at once confounded and fascinated people in Europe and beyond.
Her biography is well known by now. Plucked out of obscurity by then-Chancellor Helmut Kohl after the Berlin Wall fell, Merkel became minister for women and youth in the first post-reunification government.
In her early years, she made headlines for crying in a cabinet meeting when a policy debate went against her, but very soon established herself as a force to be reckoned with, rising against the odds in a party dominated by males, westerners and Catholics.
By the time she took on Schroeder, she had shown a ruthlessness in shunting aside male rivals that led some to compare her to British Prime Minister Margaret Thatcher, dubbing her "Iron Maedchen" or "Maggie Merkel."
Once in office, she was renamed "Summit Queen," for brokering a series of international deals on climate change and the EU budget.
These days the nicknames are less flattering. Transforming herself into a savior of the euro will be her toughest challenge yet.
Merkel's foreign critics accuse her of failing to understand the gravity of the euro zone crisis in its early stages, and then resisting "shock and awe" policies that might end the contagion that has spread from small countries like Greece, Ireland and Portugal, to big economies like Spain, Italy and even France.
Some of that criticism seems well-founded.
Merkel dragged her feet on a Greek rescue in early 2010 in a drive to win concessions from Athens, had to be muscled by her euro partners into setting up a euro zone rescue fund in May of last year and then distracted the bloc in early 2011 by pushing the divisive "Euro Plus Pact," a set of non-binding fiscal rules whose main aim seemed to be to placate German eurosceptics.
In recent months, however, Merkel has quietly shifted gears, dropping her objections to giving the bloc's rescue fund -- the European Financial Stability Facility (EFSF) -- new powers to buy bonds and softening her opposition to recapitalizing banks.
She's given in to longstanding French demands for closer economic coordination between euro zone leaders and talked openly about the need to move toward "political union."
Officials in her government have also signaled Germany could be open to "leveraging" the EFSF, under certain conditions, to give it more firepower.
A year ago, no one would have predicted that Berlin would be ready to make such far-reaching concessions.
"We don't think it's helpful anymore to talk about red lines that we won't cross," an official close to Merkel told Reuters, in a sign of the shift.
One crisis-fighting taboo remains -- joint euro zone bond issuance.
This is the "big bang" step some economists believe is needed to save the bloc from collapse. Merkel has been criticized by some of her partners outside Germany for resisting it.
But even if she wanted to pursue this course, the hurdles would be huge. Many legal experts in Germany interpreted a decision by the country's top court last month as effectively ruling out euro bonds.
This step could sharply raise Germany's borrowing costs and reduce incentives for euro zone stragglers to reform their broken economies. It is also opposed by four in five Germans and would be next-to-impossible for Merkel to push through parliament.
"During the financial crisis in 2008 we came out and guaranteed bank deposits and it calmed the situation. The Swiss central bank recently put a ceiling on the level of the Swiss franc and that's working," the official close to Merkel said.
"But in the euro zone you can't simply draw a line in the sand like this. There is no miracle solution. This is the big dilemma."
STEP BY STEP
Instead Merkel is relying on what she herself has called a "step by step" approach that avoids "risky, adventurous" moves.
She has made clear, for example, that she is unwilling, for the time being, to consider a Greek default because it might unleash contagion on a par with that experienced after the bankruptcy of Lehman Brothers in 2008.
"Afterwards everyone will ask whether it was really necessary to allow Greece to default, why we hadn't foreseen the consequences," she told the audience in Magdeburg. "Before we close our eyes and take a big step into the unknown, we need to think about whether we can really justify and defend it."
No matter how responsible it sounds, this cautious approach has left just about everyone dissatisfied.
In a German magazine interview over the weekend, World Bank President Robert Zoellick decried a lack of vision in Germany, comparing Merkel unfavorably to her mentor Kohl, who oversaw reunification and pushed the country into the euro against the wishes of many Germans. British Prime Minister David Cameron accused euro zone leaders this week of doing "a bit too little, a bit too late."
One man at the Magdeburg event told Merkel that if she were the CEO of a company she would have been fired long ago. "In the corporate world, this would be called mismanagement. You'd be gone immediately," he said.
The criticism has clearly taken a toll on Merkel. Asked by popular TV presenter Guenther Jauch last month whether she was enjoying her job, all she could muster was: "I am not unhappy. I have a lot of work that keeps me occupied."
But people who have worked closely with Merkel over the past months, say the criticism has also focused her mind.
"Merkel always said that the worst part of life in East Germany was that people weren't allowed to test their limits. She can't complain about that now," the official who is close to her said.
"These regional conferences have been an opportunity to look people in the eye, even if they are very critical. She's come out of them energized."
The senior CDU lawmaker said he expected Merkel to face intense pressure to deliver the same overwhelming parliamentary majority that she did on the euro rescue fund last month, when the Bundestag votes on a second Greek aid package and a new permanent rescue mechanism in the coming months.
"It's not going to get easier. Both will be difficult," he said. But when asked whether the pressure was affecting Merkel, he said: "To be honest, from what I've seen, the more pressure Merkel is under, the better she gets. She is an amazing machine."
Merkel gave a rare glimpse into her own state of mind late last month when she attended an event to present a book on her young Economy Minister Philipp Roesler, who has also come under fierce criticism in recent months as the party he leads, the Free Democrats (FDP), has crumbled in the polls.
"You need to look optimistically into the future, you can't let yourself be driven crazy, you need to chart your own path," Merkel said, directing her words to Roesler as much as the group of reporters gathered at the Catholic Academy in Berlin.
"You need to ask yourself, time and again, will you be able to stand by the course you have chosen in one year, in two years. At least then you'll have done your best. Nothing is sadder than taking a quick decision and then realizing later that you should have done it differently."
(Writing by Noah Barkin; editing by Janet McBride)
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