TAKING FULL CONTROL
Forged in the fire of a bond market inferno, the so-called Frankfurt Group has grabbed the helm of the 17-nation currency area in a few short weeks.
The inner circle comprises the leaders of Germany and France, the presidents of the European Commission and of the European Council of EU leaders, the heads of the ECB and IMF, the chairman of eurozone finance ministers, and the European commissioner for economic and financial affairs.
Europe’s politburo met four times on the sidelines of last week’s G20 summit in Cannes, issuing an ultimatum to Greece that it would not get a cent more aid until it met its commitments, and arm-twisting Italy to carry out long-delayed economic reforms and let the IMF monitor them.
In a tell-tale recognition of the new ad hoc power centre, members wore lapel badges marked “Groupe de Francfort”.
US President Barack Obama attended one of the meetings, getting what he joked was a “crash course” in the complexity of Europe’s laborious decision-making processes and institutions.
“He proved to be a quick learner,” one participant said.
Obama argued for the eurozone to make its financial backstop more credible by harnessing the resources of the ECB, but German chancellor Angela Merkel and ECB president Mario Draghi resisted, sources said. He also supported a proposal to pool eurozone countries’ rights to borrow from the IMF to help bolster a firewall against contagion from the Greek debt crisis, but Germany’s central bank opposed this too, the sources said.
Obama referred obliquely to the debate at a news conference the next day, saying: “European leaders understand that ultimately what the markets are looking for is a strong signal from Europe that they’re standing behind the euro.”
Hours earlier, a television camera in the Cannes summit conference room caught Obama and British Prime Minister David Cameron discussing the issue.
Cameron has called for the ECB to act as the lender of last resort for the eurozone, as the Bank of England does for Britain.
When Merkel entered the room, Obama pulled her aside for a private conversation. An open microphone caught his opening words: “I guess you guys have to be creative here.”
The Frankfurt Group came about on the hoof to try to fashion a crisis response in something closer to the short timespan of frantic financial markets. It seems destined to endure, not least because the growing imbalance between a stronger Germany and a weaker France means other players are needed to broker decisions.
It aims to bridge the ideological gulf between northern and southern Europe, and between supporters of the orthodox German focus on fiscal discipline and an independent central bank with the sole task of fighting inflation, and advocates of a more integrated and expansive economic and monetary union.
The presence of IMF managing director Christine Lagarde gives the group greater credibility in the markets, as well as providing a reality check on what international lenders expect and the limits to their willingness to support the eurozone.
It all began with a blazing row at the Old Opera House in Frankfurt on October 19 that spoiled Jean-Claude Trichet’s farewell party after eight years as president of the ECB.
As the fallout from Greece’s debt crisis singed European banks and panicky investors dumped eurozone government bonds, French President Nicolas Sarkozy, who had snubbed the ceremony, flew in at the last minute to meet a visibly irritated Merkel.
Sarkozy had said that day that France and Germany were at odds over how to leverage the eurozone’s financial rescue fund. The French wanted to let the European Financial Stability Facility operate as a bank and borrow money from the ECB.
“In Germany, the coalition is divided on this issue. It is not just Angela Merkel whom we need to convince,” Sarkozy told politicians.
At the Frankfurt meeting, described as “explosive”, Merkel and Trichet firmly opposed the idea, which they said would violate the EU’s treaty prohibition on the central bank financing governments.
Germany insisted on that clause when the ECB was created because of its own history of fiscal abuse of the central bank that fuelled hyperinflation in the 1920s and funded the Nazis’ massive rearmament in the run up to the Second World War.
As French officials tell it, Merkel is not so hostile to the proposal as her finance minister, Wolfgang Schaeuble, and the head of the German Bundesbank, Jens Weidmann.
The French are convinced that Merkel understands the ECB will have to be more centrally involved in fighting bond market contagion, but she cannot get it through her divided coalition for now. They see the ECB as the main centre of resistance.
After hearing a chorus of leaders at the G20, Merkel acknowledged that the rest of the world found it hard to understand that the ECB was not allowed to be lender of last resort.
But the crisis may have to get still worse before the Germans and the ECB relent, if they ever do.
The Frankfurt Group has begun to stir resentment among those who are excluded. Creditor countries such as the Netherlands, Slovakia and Finland, where public hostility to further eurozone bailouts is fierce, are already grumbling about decisions being taken behind their backs.
In Greece and Italy, there has been criticism of the perceived arrogance of “Merkozy”, in summoning their prime ministers to receive ultimatums.
German and French officials shrug off such complaints as inevitable, noting that EU partners are even more unhappy when their countries do not agree, since that paralyses Europe.
“There is always a trade-off between legitimacy and efficacy,” said an EU official involved in the Frankfurt Group. “The euro area institutions were not designed for crisis management so we need innovative solutions. In an emergency like this, we have to have a structure that works,” he said, adding that the presence of the European Commission and of European Council president Herman Van Rompuy guaranteed that the interests of smaller member states would be taken into account.
EU officials had held conference calls with the 15 other eurozone states during the Cannes summit “to keep them in the loop”. The head of the EFSF, Klaus Regling, was secretly flown to Cannes to brief the leaders on the state of accelerated preparations to leverage the rescue fund.
Merkel long resisted French pressure to create more of an “economic government” in the eurozone, not least because she did not want Germany to be in a minority on issues such as bailouts, free trade or the EU budget.
She also did not want to alienate German allies and neighbours such as Denmark, Poland and the Czech Republic, which are not in the euro.
But recent problems in smaller states that aggravated market turmoil — Finland’s demand for collateral on loans to Greece and Slovakia’s parliamentary wrangling over increasing the EFSF’s powers — convinced her of the need for stronger leadership.
Whether the Frankfurt Group will be the forum that finally convinces Germany to accept a bigger crisis-fighting role for the ECB, or the creation of jointly issued eurozone bonds, remains to be seen.
Here’s a look at the eurozone and how it has shaped the crisis.
* The euro came into effect on January 1, 2002. At the time, 12 of 15 countries in the EU opted to share one currency. From Finland to Spain, about 80 billion coins were distributed.
* There are currently 27 members of the EU.
* Ten members do not use the euro as their currency. The most prominent of these is Britain.
* Greece has had dire circumstances with regards to the euro. The public sector was responsible for 40% of the country’s GDP. The government spent too much and was then forced to cut back in 2009. When that happened, unemployment skyrocketed to 12% last year.
* Unemployment in the eurozone is at an all-time high, with 10.2% of the population out of work.
* More than 16 million people are unemployed in the eurozone, the highest since statistics began in 1998. By comparison, 13.9m people in the US are unemployed.
* The EU accounts for 20% of the world’s imports and exports. The GDP in 2010 was over €12.2 trillion.
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