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Britain: all roads out of eurozone crisis lead to Frankfurt



David Cameron tells Germany that European Central Bank may eventually have to play the key role in saving the euro
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Angela Merkel pictured today as she voted in the Bundestag to strength the euro bailout fund. Photograph: Rainer Jensen/EPA

BRUSSELS

Angela Merkel is experiencing pressure familiar to her mentor, the former German chancellor Helmut Kohl.

Voices around Europe are calling on Germany to break with discipline, embodied for decades by the Bundesbank, and allow the European Central Bank to play a pivotal role in boosting the firepower of the bailout mechanism for the eurozone.

Merkel is resisting such calls because Germany believes that a sacrosanct principle of the Bundesbank – passed to the ECB – should be respected. This is its independence.

Nicolas Sarkozy had been in the lead, Hugh Carnegy and Ralph Atkins reminded us in Wednesday's FT, in calling for the ECB to be "in the front line intervening massively and playing the role of a federal central bank". Those were the words of a senior official quoted in the FT. Sarkozy wanted the European Financial Stability Facility (EFSF) to be turned into a bank and to operate in close concert with the ECB to erect a "wall of money" to prevent the debt crisis spreading from Greece to Spain and Italy, in the words of Carnegy and Atkins.

But Sarkozy backed down after Merkel flatly rejected his proposal at a meeting last Wednesday in Frankfurt at a farewell for the outgoing ECB president Jean-Claude Trichet. Berlin feared that the Sarkozy plan would weaken the ECB's strict mandate on monetary policy.

Merkel made clear in the Bundestag on Wednesday, shortly before she won overwhelming support for her plans to boost the EFSF, that her view had prevailed. Quentin Peel quotes the chancellor as saying:


That idea is off the table.

But one European leader is keen for "that idea" to be placed back on the table. David Cameron told the European Council this evening that leaders of the eurozone should not write off the idea of giving the ECB a role. One British source said:


In the end it comes down to this. Can the eurozone create enough of a firewall? Ultimately the ECB can stand behind the euro and say: we have as many euros as it will take to defend the single currency.

British sources made clear that the prime minister will not be dictating to the 17 members of the eurozone, not least because Britain is not part of the EFSF. But Britain believes it has a right to express its view – and has some influence – because it is involved in one element of the package under discussion. This is the plan to recapitalise banks. Britain believes that the overall package cannot be agreed until all elements come together, thereby giving Britain something of a say in areas technically controlled by the eurozone, such as the future of the EFSF.

Britain wants to keep alive the idea of a role for the ECB because it believes that, in the end, all the other options – approaching surplus nations and increasing the involvement of the IMF – are likely to prove insufficient. There is a feeling that it may only be when the eurozone crisis reaches epic proportions that Germany will be persuaded to change its views on the role of the ECB.

Merkel may feel that pressure to ease classic Germany fiscal and monetary discipline has a familiar ring. The Bundesbank was deeply sceptical of plans to create the euro 20 years ago because it feared that a single currency without the discipline of fiscal union would be dangerous.

But Helmut Kohl pressed ahead, as I blogged recently, because François Mitterrand demanded a heavy price for French consent for Germany unity. Germany had to anchor itself fully in Europe by embarking on a move that, to many in Frankfurt, was unthinkable: scrap the Deutschmark.

Britain believes that, once again, Germany will have to make the same calculation. Europe will have to come first which means that, in the end, any price will have to be paid to save the euro.

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