After giving in twice, Germany could now play a positive role

HAVING spent the past 18 months treating the economic crisis as a moral defect, eurozone leader Germany has made some remarkable strides in the last few weeks.

So far, its approach and that of the other non-crisis eurozone countries has been grudging, judgmental and inadequate at every stage.

The finance ministers’ meeting that continues today in Luxembourg and the two-day summit in Brussels later this week will tell whether this is finally changing.

These AAA countries have become a major part of the problem, firstly by applying the wrong solution, and secondly by their attitude, which has fed resentment in the crisis countries.

This has not just created a virulent form of euroscepticism, but, in Greece, is threatening government and undermining the politicians being depended on to deliver the reforms.

It has undermined the credibility of the euro and cast doubt on the ability of the European Union, its institutions and the political leaders to act effectively. The result is that the long-threatened contagion is at the gate. Every Molotov cocktail on the streets of Athens, every defection by a Greek deputy and every dissident exclamation by an EU leader increases the cost of insuring Irish, Portuguese and Greek debt against default.

There are plenty of bad signs: Moody’s threat to downgrade Italy’s credit ratings; Belgium’s equally high debt; and Spain’s continuing fragility because of the state of its local banks that have been increasing their dependence on the European Central Bank.

The good news is that Germany has moved twice in the past few weeks and may now be willing to take the responsibility their size demands and play a positive role.

Germany has a habit of insisting on rules to guard against the sins of others, but often turns out to be the biggest sinner itself. This time, Germany insisted the International Monetary Fund (IMF) be involved in any bailout because, as an outsider, they argued, it would insist on nations sticking to austerity packages.

However, the IMF has had to use its clout against Germany, firstly to insist they would permit a second rescue package for Greece by threatening not to contribute to the next loan tranche. Germany conceded but lobbed in another issue: they wanted private sector lenders involved too. They were quickly warned this would be read as a default.

It took another swipe by the IMF and the European Commission to get Berlin to change its mind — but whether Germany will take the next step is far from certain. Everyone now recognises that the euro needs a single institution to remove it from the strains of domestic politics. ECB outgoing president Jean-Claude Trichet surprised Europe by saying the eurozone needed a finance ministry like the US Treasury.

Everybody adds the caveat of “in the future”. But the euro needs the future to arrive now. The building blocks are all in place. Sovereignty has been ceded with the soon-to-be agreed governance package giving the EU more than just an oversight of every country’s budget.

The dreaded Transfer Union has become a reality with the second Greek bailout. All that’s left is to agree to unite the currency on the markets with some form of eurobond that will use the united strength of the currency to borrow at affordable rates and lend to member states too fragile to borrow themselves.

It would also put an end to the cacophony of voices making dissenting statements, frightening the often skittish markets.

This week will tell a lot.