Cameron Phones the Mainland

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He has done it again. British Prime Minister David Cameron has publicly voiced his deep concerns about the euro zone. London now openly fears a breakup of the common currency and is urging the Continent to integrate further to avoid collapse. In a video conference call on Thursday, Cameron spoke with his German, French and Italian counterparts about the ongoing crisis. The UK is already feeling the adverse effects of the recession on the Continent on its economy. Of course, Cameron is trying to blame Europe for his own problems − and of course that is not entirely fair.

However, the euro crisis is back with a vengeance and the British prime minister is right to be worried. British calls for action usually trigger irritated responses in Paris and Berlin. But all is quiet on the Continent. Nicolas Sarkozy is not the French President anymore and his successor, Francois Hollande, is too busy trying to avoid falling flat on his face while hitting the ground running. The last thing he would be tempted by is to tell the Brit to shut up. In Berlin, the main topic of conversation is Chancellor Angela Merkel’s leadership style. She brutally sacked one of her closest allies in her cabinet, following a painful loss for her party in the latest round of state elections in North Rhine-Westphalia. Domestically, Merkel is weakened. Now she has to make sure that she succeeds in her attempts at saving the euro. Her political future depends on that.

The latest installment of the Greek tragedy clearly does not help. Merkel’s careful, rational approach to the crisis has been repeatedly frustrated by irrational behavior in Athens. But accepting a Greek exit from the euro out of frustration would be equally irrational − Merkel likes the game of brinkmanship. However, that too, is showing its limits. Bluffs and counterbluffs in dealing with Greece feed irrational expectations and are helping to drive the currency area apart.

Let there be no illusion. A Greek exit would trigger a devastating domino effect in the periphery of Europe. Whoever tells you otherwise is either blind to what is already happening in Spain and Italy or would actually like for the euro to break up. Let’s face it: the glue that has kept the euro zone together so far is the European Central Bank with its longer term refinancing operation (LTRO) and sheer fear. However, fear is the opposite of confidence, and what the Euro area needs more than anything else is a narrative that explains why most of the crucial tools needed to deal with the crisis are in place and why short-term pain will lead to medium and long-term gain. When asked this very question, German officials openly admit that the adjustment process in Greece could very well take 10, perhaps even 20 years. According to them, Portugal, Spain, Italy, and even France must accept the hard reality that they will walk through a long valley of tears. That is hardly a confidence inspiring and uplifting perspective.

Unfortunately, sketching a vision or developing a comprehensive narrative is not Merkel’s style either. In fact in her view, a simple narrative could ring hollow and end up undermining her efforts at home and abroad to act, and mostly react, pragmatically to rapidly changing conditions. So far, Merkel left all the fundamental questions about the future of the euro to be addressed in the future, after her re-election campaign in late 2013. The famous fiscal compact, initially hailed as the gate opener for a fiscal union, already appears to have been downgraded to a second version of the growth and stability pact, which ominously failed in the past. Adding a growth pact will not do the trick. Acting on strengthening the single market, particularly in the service and banking sectors, and decisively moving towards a fiscal union will. Greece needs to be saved from its political class. The EU needs to rebuild a nation that is rapidly coming apart. No amount of austerity will do the trick, especially if its implementation relies on the very same political class that caused the mess in the first place.

Merkel’s strategy of striking the right balance between what is palatable to her voters and the bare minimum needed to save the euro zone is simply not working.

If she really wants to save Europe, the moment has come for the German Chancellor to show the same amount of boldness that she is demanding from her partners. Ultimately, that is what David Cameron asked her to do.