Is it time to get ready for La Deutsche Vita?

Euro zone leaders still have an opportunity to come clean on the financial crisis, save the currency and stop the slow, sad death of European empathy, writes DEREK SCALLY, Berlin Correspondent

AFTER FIVE YEARS and 16 crisis summits, EU leaders have no idea whether the bloc is at the beginning of the end of its economic and financial crisis or just at the end of the beginning.

It's safe to say that end-is-nigh economists will continue predicting the demise of the single currency in 2012 while its political leaders will, in true Monty Python and the Holy Grailstyle, insist the euro's not dead yet.

The EU is facing a Donald Rumsfeld-style trilemma of known knowns, known unknowns and unknown unknowns.

The first known known could come as early as February, when EU leaders hope to agree on an intergovernmental deal for a new euro-zone regulatory corset.

Whatever the legal challenges this entails, there is widespread agreement that it will reflect Germany’s wishes that national budgets in the euro zone will be subject to both Brussels monitoring and peer review, with enforceable sanctions for those who break debt rules.

Angela Merkel wants to banish deficit-spending to history, and proclaim a brave new world of austerity and balanced budgets, otherwise known as La Deutsche Vita. The immovable object of Merkel’s fiscal doctrine could meet the irresistible force of a double-dip euro-zone recession. On that front, all bets are off.

Europe’s second big known known in 2012 is the French presidential election. A second term for Nicolas Sarkozy would be a win-win situation for the French leader, allowing him to leave his French imprint on any euro-zone deal while retaining his political immunity against emboldened French investigators.

The knock-on effect in Europe of the French poll should not be underestimated. Even EU critics of the Franco-German motor agree that when Paris and Berlin aren’t talking the bloc grinds to a halt. And the recent record shows that it can take months, if not years, to get back up to speed after personnel changes in Paris and Berlin.

Sarkozy’s socialist challenger, François Hollande, could complicate matters in the euro zone. He demanded a “dynamic compromise” between France and Germany on a recent visit to Berlin, a polite way of saying he wants everything Merkel doesn’t: an ECB that is more responsive to real-world financial conditions, and pooled sovereign “eurobonds”. It remains to be seen if, as with other EU leaders, Merkel’s realpolitik could bring a President Hollande to heel.

Either way, eurobonds aren’t going away for Merkel. A favoured parlour game in Berlin political circles is to predict if, when and how Merkel will, despite her protestations to the contrary, agree to pool euro-zone debt. With a 2012 election calendar almost clear of regional polls, she has a clear run to force through the firm outline of a fiscal union before opening the door. After getting a vote on the permanent euro-zone bailout fund (ESM) through the Bundestag next month, and an increasingly erratic coalition partner, she has little to fear politically until the run-up to the general election due in September 2013.

She has two new assistants in selling eurobonds to German voters as an economic quid pro quo: the president of the Bundesbank, Jens Weidmann, and the incoming director of the ECB, Jörg Asmussen. The two softly-spoken fortysomethings, both Merkel confidantes, typify a new generation of German officials who pursue the European integration project more out of intellectual necessity than emotional conviction.

Elsewhere, parliamentary elections in Greece and Italy will see a return of the conservative government in the former and Silvio Berlusconi’s final comeback attempt in the latter. Apart from polls in Lithuania and Romania, Europe’s 2012 national election calendar is mercifully empty. That will concentrate attention even more on a possible Irish referendum. A hard-fought campaign might strengthen the Government’s hand in demanding EU concessions on Ireland’s debt burden. On the other hand, a contracting economy could tip the vote either way.

To lift the debate beyond the level of Lisbon II, the Government may consider pitching the vote, tapping into the growing European debate on the future of national sovereignty in an ever-closer union. The debate is already in full flow in Germany and Poland that a loss of national sovereignty can be compensated for by a gain in supranational sovereignty, not to mention global influence.

To win the debate, national governments will have to break a decades-old habit of claiming credit for everything the EU does well while blaming Brussels for everything that goes wrong.

Facing into another year of uncertainty with a renewal of their marriage vows, EU leaders have one last chance to come clean on the pan-European roots of the crisis, save the euro and halt the slow, sad death of European empathy.