Angela Merkel must set course for full integration or pull out of the common currency.

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The fate of the euro is in the hands of Germany

Decision time: Angela Merkel must take the lead over the euro – The
fate of the euro is in the hands of Germany

8:11PM BST 14 Jul 2011

The Italian parliament’s endorsement of a £40 billion austerity
package has temporarily eased the turmoil in the eurozone but will not
end it.

Yesterday’s vote in the senate, to be confirmed by the lower house
today, marked a truce in the political in-fighting in Rome that had
placed the debt reduction strategy in peril.

A successful, if expensive, sale of Italian government bonds also
helped steady nerves amid fears that the eurozone contagion was
spreading to one of its biggest economies.

Speculation that the European Central Bank stepped in to buy Italy’s
debt has not been confirmed, but would be significant if true.

It would suggest that the ECB is finally trying to put together a
strategy to contain the crisis. The piecemeal approach it has so far
adopted is simply not good enough.

Indeed, further turbulence could well be triggered today when stress
tests on European banks are published to reveal how exposed they are
to sovereign debt.

As David Cameron said in the Commons on Wednesday: “Eurozone countries
have to recognise that they have to do more together and faster; they
have to get ahead of the market rather than just respond to the next
crisis.”

But how? Restoring fiscal credibility by reducing deficits is
essential. Unless the countries that gorged on cheap credit are now
prepared to cut back substantially, the bail-out budget will not be
enough to cover the worst-case scenarios, in which Italy and Spain
would need rescuing.

Economists believe the existing rescue fund might need to be raised to
a colossal two trillion euros to end market fears that indebted
eurozone countries cannot be supported.

This, of course, goes to the heart of the matter: the refusal of the
eurozone, and Germany in particular, to face up to the ramifications
of monetary union. The principal architects of the euro – Jacques
Delors, Helmut Kohl and François Mitterrand – presumably knew what
they were doing.

They wanted political union and saw a common currency as a way to
achieve it, just as Margaret Thatcher predicted at the Rome summit in
1990 that precipitated her downfall. Twenty years on, Germany, as
Europe’s powerhouse economy, is now confronted with the logic of what
it agreed to then.

Either it can go for full integration, with EU control over budgets
and taxes, allowing for fiscal transfers around the eurozone and
thereby removing the sovereign debt uncertainty surrounding the
weakest members; or it can pull out of the euro, which is clearly not
something it wants to do, since this would wreck the political
project; or it can wait for further crises to hit, each one worse than
the last.

In the end, this is not really about Greece or Italy or Ireland. It
is, as it has always been, about Germany.

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