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Europe's eyes on Merkel to rebuild EU after Brexit vote

BRUSSELS (Reuters) - When the chips are down in Europe, everyone turns to Angela Merkel for a solution. But the German chancellor often sits on her hands until the last minute, then does the minimum necessary to keep the show on the road.

German Chancellor Angela Merkel attends a meeting on EU summit results at the Bundestag in Berlin, Germany July 7, 2016. REUTERS/Hannibal Hanschke

Since last month’s shock British referendum vote to leave the European Union, all eyes have been on Berlin to indicate a way out of danger for the 27 members who will remain.

As usual, Merkel, the continent’s most powerful and experienced leader, is biding her time and letting underlings air their differences without tipping her hand before she departs for her three-week summer break this week.

Votes had barely been tallied in Britain when her vice-chancellor, Sigmar Gabriel, leader of the center-left Social Democrats, and European Parliament President Martin Schulz rushed out a 10-point plan for a “refoundation” of Europe.

Lamenting that ever more citizens doubted Europe’s ability to deliver a better future, they called for a more federal Europe with the European Commission as its government, and a more flexible, growth-friendly economic policy turning away from austerity to investment in an “industrial renaissance”.

Finance Minister Wolfgang Schaeuble rapidly shot down those ideas, rejecting any need for economic stimulus spending and reaffirming his balanced budget target up to 2020 at a time when many in Europe are pleading with Berlin to borrow money free of interest and invest massively in infrastructure.

He refuses to accept that surplus countries like Germany, which has a giant current account surplus of eight percentage points of GDP, should help poorer deficit countries adjust by spending more on public investment and boosting consumption.

Furthermore, Schaeuble said those calling for a bold federal leap forward in integration had failed to understand the public disenchantment with the EU that fueled the British vote and is driving nationalistic euroskepticism elsewhere in Europe.

Rather than give more power to Brussels, the veteran conservative, who once advocated a federal “core Europe”, said it was time for national governments to take matters more into their own hands if the Commission was unable to do the job.

Schaeuble is blocking the next steps forward in euro zone risk-sharing - the creation of a European bank deposit insurance system and of a fiscal backstop for the currency area’s single resolution fund to help wind down failed banks.

The 71-year-old finance minister has also managed to delay any debt relief for Greece until after next year’s German election in September and maneuvered to delay public support for Italy’s ailing banks, saying there was no acute crisis.


Even the German head of the euro zone’s rescue fund, Klaus Regling, argued last week that Berlin and its partners needed to go further to make the currency area less vulnerable to shocks.

Restructuring Italian banks’ bad loans and forcing investors including retail savers to take losses before any public money can be injected under the EU’s new bank recovery and resolution rules could trigger precisely that kind of post-Brexit shock.

Regling called for completing European banking union by phasing in a deposit insurance scheme after a transition period. He also advocated a limited budgetary capacity for the euro area to cushion economic shocks hitting only some countries.

Both proposals have so far been anathema to Schaeuble, who speaks for a school of German fiscal hawks in warning that such steps would lead to unacceptable permanent north-south transfers inside the monetary union.

At least there is debate in Germany about what the EU should do to regain momentum and overcome the trauma of losing Britain, its second largest economy, even if much of it resembles shadow boxing before next year’s German elections.

In many EU countries, politicians have simply fallen back on blaming Brussels, with some demanding the scalp of European Commission President Jean-Claude Juncker as a scapegoat.

To be sure, Juncker has contributed to the sense of disarray by first trying to rush an EU trade deal with Canada through the European Parliament without letting national lawmakers have a say, then reversing himself under pressure from governments.

The result is that the Canada deal could be bogged down for many months, perhaps indefinitely, and the chances of getting a bigger and more sensitive trade and investment partnership with the United States wrapped up and ratified seem even more remote.

No progress on monetary or banking union, deadlock on trade - that doesn’t leave much scope for restoring public and financial market confidence in Europe.

The German and French foreign ministers, both social democrats, have issued more modest joint proposals for the EU to focus on internal and external security, managing migration and refugee flows, and boosting the economy and job creation.

Their nine-page paper, which would not require changing the EU’s founding treaty with the risk of more referendum defeats, called for a European Security Compact with a more integrated foreign and security policy and a permanent civil-military chain of command for crisis management operations.

But when it came to the euro - the economic heart of the European project - their suggestions of investment-boosting measures by surplus countries and a common fiscal capacity(budget) for the euro zone, ran into the same stonewall in the German Finance Ministry.

Merkel has broadly welcomed the Franco-German paper and broadly adopted its focus on three main themes - migration, security and growth/jobs. Whether she is willing to overrule Schaeuble and take political risks before next year’s federal elections is highly doubtful.

Yet without some initiative to provide fresh wind after the Brexit blow, the EU looks highly vulnerable to the next external shock, whether from Islamist militants, Italian banks or another surge in migration.

Writing by Paul Taylor; Editing by Janet Lawrence