Is Chancellor Angela Merkel increasingly isolated within the euro zone? Recent reports in some German media suggest she might be. The reason for the alarm is an interview by the Dutch central banker Klaas Knot, in which Germany gets all the blame for the failure to strengthen the European Financial Stability Facility (EFSF). “The most important obstacle lies in Germany, not in the Netherlands”, Knot is quoted as saying. He adds, “we haven’t moved in the right direction and it’s also clear that measures needed are happening too slowly and are too limited in size.”
For Merkel, losing the Netherlands as a staunch ally could indeed be a troubling sign ahead of a new round of high-level European meetings in Brussels.
Germany’s one-sided focus on fiscal austerity is clearly even loosing its appeal among northern European core euro zone countries, which had been staunch allies of Merkel in the crisis. The head of the European Central Bank (ECB) Mario Draghi recently pressed Europeans to get the EFSF up to speed and equip it with the financial muscle it needs. Draghi did not mention Germany by name. However, his appeal could also be interpreted as a message to Berlin to get its act together.
In Paris, after his meeting with French President Sarkozy on Friday, Italian Prime minister Mario Monti warned that the greatest danger for Europe lies in a the rise of old prejudices and mistrust between the so called north and south. He described Europe as a mountain climber walking along the edge of a cliff. Both Monti and Sarkozy would like the ECB to act as a lender of last resort. However, officially, both the Bundesbank and the German government still refuse to openly endorse a stronger role for the ECB. Merkel’s coalition also refuses to commit additional funds to the EFSF.
With the Dutch support evaporating, Merkel will find it increasingly difficult to hold firm on those two principles if the price to pay is isolation within the euro zone.
In fact, the diplomatic agenda suggests that she might already come under intense pressure in the next few days.
After his bilateral meetings with Sarkozy in Paris, the Italian prime minister will meet with Merkel in Berlin. Finally, the three leaders will meet in Rome. It is crunch time for the euro zone and Merkel does not have the luxury to procrastinate anymore.
In the words of the Dutch central banker: “A significant acceleration in decision making is needed.”