March 20, 2023

Merkel Stresses Limits to Germany’s Ability to Rescue Euro Zone

“Germany’s strength is not infinite,” Ms. Merkel told the Bundestag on Thursday. “Germany’s powers, too, are not unlimited. Consequently, our special responsibility as the leading economy in Europe means we must be able to realistically size up our powers, so we can use them for Germany and Europe with full force.”

The most important actor in the European drama, Ms. Merkel said that she would resist any outside attempts to force Germany to consent to what she called “simple” and “counterproductive” quick fixes. Once again, she rejected jointly issued euro bonds or other forms of shared debt, which several leaders, including President François Hollande of France, have called for.

“I know that it is arduous, that it is painful, that it is a drawn-out task,” Ms. Merkel said. “It is a herculean task, but it is unavoidable.”

Behind the scenes, however, Ms. Merkel is pressing allies in Paris, Rome and elsewhere to cede more power to Brussels over their national budgets before Germany would agree to provide further backing for joint efforts to bolster the euro zone. In her speech, Ms. Merkel hinted at this approach by emphasizing her view that the only way for Europe to recover fully from the crisis is to strengthen political and fiscal unity to support its monetary union.

But that is a long-term strategy. And given Ms. Merkel’s firm stance, coupled with Germany’s longstanding reluctance to make more aggressive moves to shore up the euro, Europe faces a more immediate question: If the Continent’s largest economy cannot or will not stop the euro zone from falling apart, who will?

“Merkel still thinks it’s all about introducing new rules, making countries stick by the rules, and if they stick by the rules the situation will stabilize,” said Philip Whyte, a senior research fellow at the Center for European Reform in London. “She seems to think that she has a lot more time than the markets seem to think.”

Ms. Merkel delivered her pessimistic message as she prepared to fly to Mexico for a two-day summit meeting beginning on Monday, right after a critical vote in Greece on Sunday that could determine whether the country remains in the euro zone. Investors, meanwhile, briefly pushed Spanish bond yields over the key threshold of 7 percent on Thursday, a level that had previously prompted international bailouts for Greece and two other members of the 17-nation euro zone.

With larger economies like Spain and Italy teetering, Ms. Merkel’s stern warning was not just posturing for a domestic audience opposed to bailouts, or tactical positioning before a summit meeting. Her statements reflected a growing fear in Germany that too many guarantees and payouts could threaten its own top credit rating.

That, in turn, would undermine the euro zone’s rescue efforts, which are predicated on Germany’s low borrowing costs and high standing in the markets. Indeed, German bond yields, which have been at historically low levels as investors have sought havens, have begun to creep upward in recent days.

At the Group of 20 meeting next week in Los Cabos, Mexico, the pressure for Ms. Merkel to find a way to contain financial instability and encourage growth is likely to be fierce. But far from turning toward stimulus or agreeing to some form of jointly issued debt, Ms. Merkel’s advisers say that she will remind fellow leaders of their pledges to cut budget deficits in half by next year, as Germany has done.

Ms. Merkel has found herself in a difficult political balancing act. Anger in Germany over the rising price tag for bailouts continues to grow, with more than two-thirds of those surveyed in a recent poll saying that they wanted Greece to leave the euro. But business leaders in this export-driven economy are pressing her to salvage the currency that has served them so well.

Nicholas Kulish reported from Berlin, and Paul Geitner from Brussels. Melissa Eddy contributed reporting from Berlin, and David Jolly from Paris.

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