Game, set, match to Germany

The balance of power within the EU and its institutions is changing. And Germany’s power is more evident than ever.

Whatever the outcome of Greece’s debt crisis, it is already highlighting and triggering major changes in the political identity of the European Union. While still a regional vehicle for securing peace, prosperity and a measure of political equality between large and small states, the internal balance of power between its institutions and between its member states is changing. Power is being concentrated ever more firmly in the hands of its largest members, above all Germany’s.

The immediate impact of the Greek debt and funding crisis has been to challenge entrenched assumptions about the stability of the eurozone and even its long-term chances of survival. The stability and growth pact has failed to guarantee good fiscal and debt management across the Union and the eurozone has been totally unprepared for the consequences.

Last week’s European Council (25-26 March) tells us that the eurozone’s future management and response to internal crises will respond to German priorities. This is reassuring for the many who believe there could be no better guarantor of the euro’s survival. A desire for currency stability and solidity is bred into the German bone, whether that currency is called the Deutschmark or the euro.

But this is not the way it was meant to be. The original signatories to the 1992 Maastricht treaty supported the single currency for sound political and economic reasons: it would bind a reunified Germany ever more tightly into a European confederation, it would free all countries using the euro from the Bundesbank’s domination of monetary policy by allowing them a share in the setting of interest rates for the eurozone, and it would facilitate and promote growth of the internal market.

That was the theory. In practice, the architecture of economic and monetary union was essentially a German construct and is about to become even more so.

For all French President Nicolas Sarkozy’s vaunting of a Franco-German solution, the ‘mechanism’ for dealing with the Greek crisis adopted by the eurozone’s heads of government last week was game, set and match to Angela Merkel, Germany’s chancellor.

Nothing will be done for Greece unless it is locked out of international debt markets or can only raise funds at unaffordable rates. In which case, there is a possibility that some eurozone governments and the International Monetary Fund will throw lifebelts. The eurozone can only toss one if there is unanimous agreement (that is, if Germany does not object) and on terms that dispel all suspicion of a painless ‘bail-out’. How that is supposed to help a country needing low-cost loans is perplexing.

Germany is going to manage this process while also satisfying its wider concerns. The Greek debacle is a product of poor economic surveillance and weak co-ordination. In future, all mechanisms geared to establishing and sustaining fiscal stability are to be beefed up so that economic and budgetary risks can be identified and prevented. And a ‘robust framework for crisis resolution’ will also be needed. All these objectives endorsed by the European Council last week were defined in early March by Wolfgang Schäuble, Germany’s finance minister.

We do not know how big a transformation in eurozone governance Germany thinks is necessary. Schäuble’s recent advocacy of a European Monetary Fund and highly punitive sanctions for fiscal mismanagement do not lack for ambition and speak of a desire for treaty changes. The last time member states decided to explore a major leap in financial integration was in 1988, when the European Council decided to set up a committee of experts to chart a path towards economic and monetary union. Crucially, the chairman of the committee was Jacques Delors, the then president of the European Commission.

Last week’s European Council looked elsewhere and asked Herman Van Rompuy, its president, to lead a task-force of member states’ representatives, plus the rotating presidency and the European Central Bank, to recommend measures before the end of the year. The task-force, which was asked to explore “all options to reinforce the legal framework”, will work “in co-operation” with the Commission.

The Van Rompuy mandate can be seen as confirmation of significant change in the Union’s institutional constellation. It throws into sharp relief the desire of all member states to establish the European Council as the primary institution in the EU’s governance – above the Commission and, for the moment, only casually accountable to the European Parliament.

The European Council will meet at least five times this year – and Van Rompuy’s stated wish is to have it meet every month. In future, heads of state and government will do more than set priorities; they will parcel out work to the specialist councils and gradually lock the Commission’s exercise of its powers of initiative inside the Council’s programme.

This evolution will have two major consequences. One will be the Commission’s further loss of political status and the beginning of its slide towards the role of administrative handmaiden to the Council. The second will be the inevitable domination of the European Council by the big member states, the biggest of which is Germany. The realities of population and economic power are what they are.

John Wyles is the chief strategy co-ordinator at the European Policy Centre in Brussels.