(Reuters) - It was approaching midnight at a yacht club on the French Riviera, down the road from a G20 summit. German Chancellor Angela Merkel was telling reporters about her decision to block a loan to Greece, when suddenly her finance minister interrupted to set the record straight.
Wolfgang Schaeuble told the journalists that it had been his idea to stop the flow of aid to Athens. That move had helped convince Athens to drop its controversial plans for a referendum on new austerity steps, calming financial markets. Schaeuble had personally delivered the news in a phone call to his Greek counterpart Evangelos Venizelos, in hospital at the time with stomach pains.
“Yes, indeed it was the finance minister who stopped the payment,” a somewhat startled Merkel acknowledged. “He was the one who reacted first.”
Reporters glanced at each other in surprise. Here was Europe’s most powerful leader being called out in public by one of her ministers. Instead of rebuking Schaeuble, Merkel had deferred to him, admitting he was right.
The unusual exchange in early November gives a glimpse into the complex relationship between Merkel and Schaeuble. Once his deputy, Merkel is now Schaeuble’s boss. Their bond has survived two decades of slights and reversals -- and it is now central to the euro-zone debt crisis.
Germany is Europe’s pre-eminent power, and France is No. 2. For months, markets and the media have focused on the link between Merkel and French President Nicolas Sarkozy as the key to saving the common currency from a breakup. The media have dubbed the pair “Merkozy.”
But an examination of the relationship between the German leader and her outspoken minister -- whose contrasting views on Europe mirror tensions in the broader electorate -- suggests their give-and-take may be just as crucial to the continent’s future.
“The chancellor can count on my loyalty,” Schaeuble said in an interview with Reuters. “But that doesn’t mean I‘m going to keep quiet, that I‘m going to be easy. I have the freedom to do what I think is right.”
Schaeuble, a 69-year old political veteran, has been confined to a wheelchair since being shot by a deranged man a week after German reunification. Long committed to the cause of European unity, he has heavily influenced Berlin’s response to the crisis. Some European insiders say he is perhaps the only politician capable of pushing Merkel, a risk-averse politician from ex-communist East Germany, to adopt the policies which may be needed to save the currency bloc.
“I think Schaeuble will be one of the key architects of a solution for the euro zone crisis in the coming weeks,” said Klaus Tschuetscher, the prime minister and finance minister of Liechtenstein. “He is renowned and respected for tossing out ideas without worrying what the political reaction might be. I don’t think the value of that should be underestimated.”
Since the euro zone’s troubles erupted just over two years ago, Schaeuble’s finance ministry has been a veritable factory of ideas. His fingerprints are on many of the big decisions taken by the broader bloc.
At the heart of the crisis are huge debts racked up by euro-zone governments and a spreading belief that investors in those countries’ bonds won’t get paid back in full. In the early stages of the crisis, Schaeuble proposed creating a “European Monetary Fund” to shore up weakened members. At the time, the idea sounded radical. Merkel quickly overruled it, insisting the Washington-based International Monetary Fund should be involved in any euro-zone rescues.
But a year and a half later, the bloc has created a permanent rescue facility -- the European Stability Mechanism -- that in the end looks likely to closely resemble Schaeuble’s monetary fund. Funded by euro-zone governments, the European Stability Mechanism will provide loans to members in financial trouble.
In June, Schaeuble made waves by writing to his euro-zone colleagues to demand that private holders of Greek bonds make a substantial contribution to a debt relief package. He suggested this could be achieved by a bond swap that would reduce the amount of debt the Greek government had to pay back. Many dismissed the idea as unrealistic, but the debt-swap idea has now been adopted by the euro zone.
Although Merkel was warned ahead of time that Schaeuble was sending the letter, she did not see it beforehand, her aides say -- a sign of just how much freedom the finance minister has, especially compared with other ministers.
“Merkel knew from the beginning that if she made him finance minister, her control over him would be limited, that he would have his own ideas and speak out on them,” one of Merkel’s top advisers said. “He is an anomaly in the cabinet.”
To politicians and investors outside Germany, Schaeuble’s proposals have sometimes been a source of confusion: It’s not always clear whether they have the backing of the Chancellery.
In March, for example, the finance minister struck a deal with his euro-zone counterparts on funding for the European Stability Mechanism, only for Merkel to veto it and re-open negotiations days later.
But Schaeuble’s freedom also works to Merkel’s advantage. He can float ideas while she gauges how euro-zone partners and markets react before committing to them. It’s also part of the “bottom-up” structure of the German government, where ministries are encouraged to come up with proposals for the cabinet to consider.
“Everyone in the government has a role,” said Schaeuble in his spartan office in the finance ministry, a Nazi-era structure that housed Hermann Goering’s aviation ministry during World War Two. “I’ve been in politics for a long time, I‘m relatively old, and that gives me a certain amount of independence.”
KOHL‘S HEIR APPARENT
In some ways Schaeuble’s freedom is made starker by his obvious physical limitations. The assassination attempt nearly succeeded. A little over a year ago, complications from two decades in a wheelchair were forcing him into hospital on a regular basis, and his doctors told him to slow down. In September 2010, after missing crucial summit meetings, he told Merkel he may need to quit because of his health. The chancellor told him to take a month off but urged him to stay.
Now he says he feels better. He has gained weight and resumed two-to-three hour handbike workouts in Grunewald Forest in western Berlin to stay fit.
“I was sicker in parts of 2010 than I wanted to believe,” Schaeuble said. “She said she wanted me to keep on doing the job if that was possible. She told me to get better and stay in my post.”
Merkel and Schaeuble first met in the months after the Berlin Wall fell in 1989. A lawyer by profession, he was heir apparent to West German Chancellor Helmut Kohl, and considered by many to be the greatest political talent of his generation. She was a shy 35-year-old from the other side of the Wall, working as a press spokeswoman for Lothar de Maiziere, East Germany’s caretaker leader in the run-up to reunification.
Within half a year of their first encounter, Schaeuble’s world was turned upside down.
It was October 1990 and the newly united Germany was in a buoyant mood. West Germany had just won the soccer World Cup. The country was months away from the first pan-German election in more than half a century. As the 20th century entered its final decade, a nation that had been weighed down by two world wars, hyper-inflation, a murderous Nazi dictatorship and decades of Cold War division could finally look forward with optimism.
Schaeuble, then interior minister, was leaving a campaign stop at a tavern in the town of Oppenau, near the French border, when a 37-year-old man pulled a gun and fired three shots, hitting Schaeuble in the face and spine.
“I can’t feel my legs anymore,” he is reported to have said before losing consciousness.
He was flown to a university medical centre in his birthplace of Freiburg, where doctors worked through the night to save his life. Kohl visited his right-hand man in the intensive care unit. At an impromptu news conference a few hours later, the burly chancellor choked back tears.
Schaeuble not only survived but he returned to his job in Bonn a few months later, despite appeals from his family that he quit politics. He looked frail, but Kohl kept faith in his loyal ally. To Germans who questioned whether a paraplegic could run the country, Kohl would often reply that Franklin Roosevelt had led the United States from a wheelchair through the Great Depression and World War Two.
His trust paid off. After Kohl scraped into office again in 1994, it was Schaeuble who worked behind the scenes to keep his narrow centre-right majority intact.
“He kept the coalition majority together,” recalls Peter Hausmann, Kohl’s spokesman in the 1990s and now editor of a newspaper in Bavaria. “It was a slim majority but he kept the discipline up and everyone in line.”
If Kohl had stepped down before the 1998 election and allowed Schaeuble to run against Social Democrat Gerhard Schroeder, the feisty lawyer from Freiburg might have become chancellor. But Kohl was intent on leading the country into the single currency, an ambitious project that he had pushed over the objections of many compatriots, and ran for an unprecedented fifth term.
Kohl lost to Schroeder, and Schaeuble took his place as head of the conservative Christian Democratic Union. Schaeuble named the up-and-coming Angela Merkel as his deputy.
It was a pairing that would last less than a year and a half. By December 1999, Kohl was caught up in a campaign finance scandal. Merkel penned an article for the Frankfurter Allgemeine Zeitung newspaper which hit German politics like a tsunami. In it, she urged the party to move on “without its old war horse” Kohl.
The godfather of the Christian Democrats could not believe the cautious young protégée he had plucked from obscurity could have written the article without the approval of her boss, Schaeuble.
Kohl launched a withering behind-the-scenes campaign to undermine the man he had once anointed his successor. Less than two months later, after discrepancies emerged in Schaeuble’s story about a party donation, he was forced to resign.
Merkel was left standing. Hailed as the “clean face” of the Christian Democrats, she was catapulted into the party leadership.
“It was an extremely difficult situation for Schaeuble,” said a former minister in Kohl’s government who witnessed the drama at first hand and knows both Schaeuble and Merkel well. “At the time there was a strong yearning in the CDU for something new, for someone who wasn’t in the Kohl orbit like Schaeuble. She profited from the Kohl scandal.”
In “My Way,” a 2004 book of interviews with Merkel, she confirms that Schaeuble did not know about the article before it was published. One reason for writing it, she says, was to give him the freedom to run a party over which Kohl still cast a long shadow.
Schaeuble said he does not believe Merkel set out to topple him when she wrote the piece. He describes their working relationship as good, while making clear the two are not friends. He played down the significance of other slights over the years, such as Merkel’s refusal to back him for the German presidency in 2004.
In his 2010 biography of Merkel, Gerd Langguth describes how Schaeuble waited in vain for weeks to speak with her about the presidential post he coveted, only to get the cold shoulder. During a joint trip to Turkey at the time, the book says, Merkel made sure she was never alone in a room with Schaeuble to discuss the matter.
A year later, Merkel unseated Schroeder to become the first woman chancellor in German history. She named Schaeuble interior minister, preferring to lock him into her government rather than
give him a role outside the cabinet, such as parliamentary floor leader, where he might have proven dangerous.
When she was re-elected chancellor in the autumn of 2009, just as the first wave of the global financial crisis receded, Schaeuble was Merkel’s surprise choice to run the finance ministry. His mastery of financial details during coalition talks convinced her he was the right person for a post that had been expected to go to her coalition partner, the Free Democrats, or her close Christian Democratic ally, Thomas de Maiziere.
“IMPOSSIBLE BECOMES POSSIBLE”
Since then, Schaeuble has emerged as Merkel’s most important minister and a respected shaper of policy in Europe at a time of unprecedented financial turmoil.
He is a French speaker who maintains excellent ties with France and knows President Nicolas Sarkozy from their days as interior ministers. At the Cannes summit, when Merkel could not make a crucial meeting of euro zone leaders because of a previously arranged meeting with U.S. President Barack Obama, Sarkozy pressed her to send Schaeuble in her place. She agreed.
It was Schaeuble who pushed hard for the Christian Democratic Union to demonstrate its commitment to Europe at a party congress held in Leipzig last month under the banner “For Europe, For Germany.” In a crucial vote in parliament in late September, he also helped convince party allies to back enhancements to the euro zone’s rescue fund, averting a government crisis for Merkel.
But the differences between Schaeuble and Merkel on Europe are sometimes hard to hide.
While Merkel seems focused on limiting the damage to Germany from the debt crisis, Schaeuble sees the crisis as an opportunity to complete the political integration of Europe that was missing when the euro was launched.
In public, he sticks to the party line on controversial crisis-fighting proposals. When asked last month whether he could envision common euro-zone bonds -- an idea Merkel staunchly opposes -- Schaeuble’s initial reaction was: “Now I need to be careful to say the same thing as the chancellor.” He then went on to say it was too early to consider such a step.
But people who know him say Schaeuble would probably be ready to back such ideas, if the alternative was a breakup of the currency bloc.
“He’s for euro bonds,” said the former Kohl cabinet minister who worked with both for years. “He can’t come out and say that, but if you look carefully at what he’s been saying he won’t exclude euro bonds like some of the others. He’s dropped some clear hints with his language.”
EU leaders agreed at a summit meeting in Brussels last week to press ahead with forming the “fiscal union” Schaeuble has long favored, under which euro-zone members relinquish control over budget policy. They also freed up more funds for the IMF to help troubled euro states like Italy and Spain, and decided to bring forward the launch of their permanent rescue fund by a year.
But these steps may be insufficient to stop the rot. And pressure on Germany to take bolder action could rise in the coming weeks.
If a euro-zone breakup looms, Schaeuble will again have to decide whether to speak up and challenge Merkel, as he did light-heartedly in Cannes. Like Dick Cheney under U.S. President George W. Bush, he has nothing to lose, no higher post to shoot for, only his vision of what needs to be done.
“When things get really difficult ... suddenly solutions which seemed impossible become possible,” Schaeuble said.
“Because of this, the crisis represents an opportunity. I‘m not saying that I enjoy being in a crisis, but I‘m not worried. Europe always moved forward in times of crisis. Sometimes you need a little pressure for certain decisions to be taken.”
Editing by Sara Ledwith and Simon Robinson