How the deal was done

EU SUMMIT:German chancellor Angela Merkel was met with uncompromising and forthright demands and, this time, the policy changed

THE NEW deal to confront the debt debacle was finally struck around 4am in Brussels yesterday as talks between weary EU leaders drifted past their 13th hour and onwards towards a rainy sunrise.

At issue from the outset was whether Angela Merkel would give Germany’s assent to contentious new measures to provide direct aid to banks and buy Italian bonds on the open market. Having said No all along, she finally gave the go-ahead for yet another escalation in the battle to save the single currency.

The undercurrents had been moving but not quite visibly.

“It’s never clear until the very moment that they have to deliver,” said a high-level European figure of Berlin’s approach to negotiations.

Although the scope of the deal would be far wider than thought in the long weeks of brinkmanship and public divisions, agreement was already taking shape when global leaders met in Mexico for a G-20 summit. Merkel faced renewed pressure from President Barack Obama for action to douse the flames but gave no public indication of any change.

But change was afoot even as top Berlin officials warned there was no scope for flexibility before parliamentary votes last night on the fiscal treaty and the treaty setting up the ESM. German finance minister Wolfgang Schäuble had travelled to Paris on Tuesday night for a pre-summit dinner with his French, Spanish and Italian counterparts.

The Spanish bailout proposal was not working, an initiative that specifically ruled out direct aid, and Italy was coming under market pressure again. When these questions came to be settled in the middle of Thursday night, the way opened for Taoiseach Enda Kenny to seize a deal to cut Ireland’s onerous banking debt.

After months of fruitless campaigning, this marked a breakthrough for Dublin with the beginning of a new approach to mountainous debts assumed by the Irish people when the last Government guaranteed the banks.

Kenny had written to his counterparts on the banking question in the days after the fiscal treaty referendum last month. At one stage or another during the summit, he spoke with every one of the other 26 leaders.

The Taoiseach’s basic message to the summit was unchanged from previous encounters: Europe needs a success; Ireland can be that success; Ireland is fulfilling its obligations under the EU-IMF-ECB troika; some form of bank debt relief would ease the path back to private markets.

“I’m a hard grafter and, as some of them found out, they shouldn’t tangle with me too often,” Kenny said yesterday.

Yet even he acknowledged it was never fully apparent that the sands would shift at this summit. In the hours before the meeting began, Kenny had met many of his European counterparts at talks in Brussels organised by Fine Gael’s European Parliament affiliates, the European Peoples’ Party.

“Before the meeting there was no great evidence of concessions being given here. I went to an EPP meeting in advance of the heads of government meeting and it was a very normal type of discussion there,” the Taoiseach said.

Merkel landed in Brussels warning that Europe was facing “fundamental decisions” over its future but insisting she would agree only to “sustainable, not flash-in-the-pan” solutions. This was hardly the visionary language that might have signalled a change of mind in Berlin.

Like all other leaders, the chancellor was aware that Italy’s unelected premier Mario Monti was readying a big play for decisive new action.

Monti had spoken in the days before the summit of keeping the meeting going until Sunday night if that was required to secure appropriate action. The feeling among some top-level people was that the technocratic chief might well take his fellow leaders hostage if he did not get his way.

When his intervention came late on Thursday night, it was uncompromising and forthright. Rome would not sign up to a new growth plan for Europe if emergency measures were not taken to calm down the tension in debt markets.

Although other leaders were not at all happy to be addressed in this way, Monti conveyed the message that he could not leave for Rome without an immediate and appreciable concession. A summit source said it was implicit in his remarks that this was crucial for his administration and that any threat to it could lead to the return of the dreaded Silvio Berlusconi.

Monti wanted the EFSF or ESM funds to buy Italian bonds, something Merkel had repeatedly rejected only days previously. He knew he could count on French president François Hollande and he knew too that Spanish prime minister Mariano Rajoy would stand behind him.

When Rajoy spoke, he said Madrid would also spurn the growth agreement if short-term steps were not taken. The Spaniards believed all along that direct bank aid would have to be kept in play, and Rajoy wanted movement quickly. In the hackneyed parlance of political debate, nothing would be agreed until everything was settled.

A damaging stand-off was in prospect. European Council president Herman Van Rompuy changed the summit agenda. He scrapped a lunch for euro zone leaders which was scheduled for Friday and asked the currency members to stay behind after dinner, which did not begin until after 11pm.

“This one is going to drag on,” sighed a hungry German official around midnight. “Italy and Spain won’t agree anything formally on growth until bond-buying is decided.”

By this stage, Italy had already beaten Germany in the Euro 2012 semi-final. To some eyes, this was portentous. Merkel-Monti contacts were ongoing throughout the evening. German officials stopped counting at 10.

Unnoticed by the outside world, top finance ministry officials from euro zone countries were meeting elsewhere in Brussels on Thursday evening. At around 6pm they were called to the vast Justus Lipsius complex, where EU summits take place, for talks with the “sherpa” officials who act as intermediaries between heads of state and government.

Although the objective had been that they would have the necessary work completed for the euro zone lunch, Van Rompuy’s decision to bring forward the discussion effectively meant that decisions would be needed before markets opened in the morning.

It was at this stage that work began in earnest to craft the crucial “euro area summit statement” which heralded the new departure.

For the Irish camp, it was important to ensure the principle of equal treatment for banks was established. After all, it would have been politically risky for Kenny to find himself with nothing to show for the endeavour if Rajoy secured direct bank aid.

This casts a certain light on the Government’s insistence on an explicit reference to Ireland in the statement, something for which other leaders wanted explanations before agreeing to it. The key point, however, was that they did.

The morning after the night before, concern was written deeper than usual on the faces of German diplomats and officials. The headlines from home were dire. “The Night Merkel Lost” proclaimed the influential Spiegel Online website, while Die Welt newspaper dubbed it “Merkel’s Defeat in a Historic Night”.

A narrative of a Monti triumph was in full swing and German officials were under the gun to spin it back in the chancellor’s favour. “This ‘Monti victory’ version has far shorter legs than anyone realises,” complained one Merkel aide.

But a U-turn is a U-turn. The fight against the crisis now enters a new phase.