Even by his own high standards, French President Nicolas Sarkozy excelled himself as he bounded out of the emergency summit of European leaders and on to a specially made-for-TV stage.
The tensions were palpable, the theatrics mesmerizing. It was well past midnight and the leaders, charged with saving the euro, were getting nowhere fast after a fine Friday supper. Greece might be saved. But Portugal? Ireland? Spain? Even Italy?
Assorted weary diplomats and eurocrats in the corridors of the unlovely Justus Lipsius building in Brussels were predicting an all-nighter when the text messages started pinging and the closed-circuit TV screens flashed the message: “Sarkozy press conference.”
The summit was over. It was 12:30am. Sarkozy and his entourage swept into the French delegation’s media room, which had been given a makeover — fancy lighting, a big blue backdrop with a special summit logo behind the president, the 16 flags of the eurozone countries.
Sarkozy claimed the political leadership of the 16 members, announced a defining victory against the markets and the “speculators” wrecking the currency. The metaphors were all martial. Europe was at war. He would not give away his “lines of defense.” By the time the markets opened on the morning of May 10, though, the enemy would have learned its lessons and beat a retreat.
In the previous hour upstairs at the summit, Sarkozy had thrown a wobbly.
“It was really a drama,” said an experienced European diplomat. “A very abrupt end to a summit — because Sarkozy said he had had enough and really forced [German Chancellor Angela Merkel] to face her responsibility.”
“He was shouting and bawling,” a European Commission official added. “The Germans were being very difficult and not only the Germans. It was a big fight between Sarkozy and Merkel.”
“Our beloved and fearless leader loves this kind of situation,” a French finance ministry official said. “It may have been that he was a little forceful and I think that he would have been right to be because it was a serious situation in there.”
Deadly serious. Merkel said two weeks ago that the crisis triggered initially by Greece’s debt problems had called the EU’s future into question — that the EU was facing its biggest challenge since 1990, the collapse of communism and the unification of Germany.
According to senior Spanish government officials quoted by Spain’s El Pais, Sarkozy called Merkel’s bluff on what, 48 hours later, turned into a massive financial package that has rewritten the way the single currency functions and changed the EU in fundamental ways that may take years to play out.
“If at a time like this, with all that is happening, Europe is not capable of a united response, then the euro makes no sense,” Sarkozy told the eurozone leaders, according to El Pais on Friday last week.
It quoted Spanish Prime Minister Jose Luis Rodriguez Zapatero as telling his colleagues this week that Sarkozy threatened to quit Europe’s monetary union.
“Sarkozy went as far as banging his fist on the table and threatening to leave the euro,” one unnamed Zapatero colleague told the paper. “That obliged Angel Merkel to bend and reach an agreement.”
The French had Spain, Italy, Portugal and the European Commission lined up behind them. On the other side stood Germany, ranged alongside the Dutch, the Austrians and the Finns, all quietly hoping Merkel would prevail.
The leaders’ after-dinner debate signaled that Europe was in the throes of an existential crisis, according to diplomats and officials familiar with the proceedings.
“This discussion touched on the very sinews of the state,” said one diplomat.
“It was a fundamental discussion about sovereignty, about the role of the member state, about what the EU is for, the role and power of the European Commission,” a second diplomat said.
Sarkozy claimed the outcome as a famous victory. In fact, he had bought himself some time, with the leaders agreeing to convene an emergency session of the EU’s 27 finance ministers the next day to work out the fine print.
By 2:15am on May 10, the deal was done: a 750 billion euro (US$929 billion) safety net for the single currency, made up of three elements — a fast-track fund run by the European Commission, a much larger system of loans and loan guarantees from the 16 eurozone governments, with the IMF putting up one euro for every two from the Europeans.
Europe was opting for shock and awe. Merkel had repeatedly declared that “politics has to reassert primacy over the financial markets.”
This was the attempt.
However, a decisive factor in swaying the argument may have come not from Berlin, Paris or Brussels, but from Washington. Since their first summit on the Greek crisis on Feb. 11, the Europeans had been prevaricating, agonizing and quarreling. Prompt action in an emergency is not the strongest suit of a union of 27 governments. Washington was frustrated.
“The Americans were complaining that there was no credibility in the way the Europeans take decisions,” one diplomat said.
By two weeks ago, Washington had had enough as the crisis threatened to spiral out of control. In Brussels and Madrid, US Vice President Joe Biden privately told European leaders to get their act together. A few hours before the Sarkozy show on May 7, US treasury secretary Timothy Geithner pressed European finance ministers for a big decision and promised help from the US Federal Reserve.
Then on May 9, US President Barack Obama went on the phone to Sarkozy and Merkel.
“The 750 billion euro fund was the idea of the Americans, who insisted on the need to mobilize massive money to impress the markets and to stop bleeding confidence. That was their concrete message,” a diplomat said.
Tellingly, the White House confirmed that Merkel, not Sarkozy, was the main obstacle to a decision staggering in its scale and ambition. Obama and Sarkozy “agreed” on the need for urgent action, while Obama and Merkel “discussed” the need for urgent action.
By early Monday last week, the finance ministers were rushing to meet Sarkozy’s promise that the huge rescue package would be ready by the times the markets opened in the Far East. They missed the deadline for Australia and New Zealand.
Outline agreement had been reached on the European fund of 500 billion euros. But who would control it? The Germans insisted it had to be national governments, not the European Commission. They won that argument and French finance minister Christine Lagarde pushed for a rapid conclusion before the Tokyo traders switched on their computer screens.
As argument continued over how to label the rescue, the Dutch conjured a new concept that kept everyone happy — a “special purposes vehicle.” The deal was done. France had won. Germany had lost.
“This was supposed to be a German euro. It’s turned into a French euro,” a German expert complained.
By Wednesday last week, with the implications of Europe’s giant leap in the dark beginning to dawn, European Commission President Jose Manuel Barroso went further. Seeking to build on the breakthrough the weekend before last, he proposed even stronger measures to shore up the euro. The safety net agreed, despite German hostility, is temporary — for three years. Barroso said it should be permanent.
He wanted member states’ budgets to be “peer reviewed” by his boffins and European finance ministries before they went before national parliaments. A direct assault on national sovereignty and parliamentary democracy, many complained.
Barroso’s argument was for full-fledged harmonization of tax and spending policies among the countries sharing the currency; otherwise the euro had no future.
“Let’s be clear. You can’t have a monetary union without having an economic union,” he said. “Member states should have the courage to say whether they want an economic union or not. And if they don’t, it’s better to forget monetary union altogether.”
And in Aachen the next day, Merkel started talking about “the pound, the deutschmark, the franc and the drachma.”
It sounded almost nostalgic for the old, simpler days of Germans’ love affair with their national currency, though her speech was to advertise her credentials as a fervent European.
On Monday last week, following the most momentous weekend in Brussels for years, the euro rallied on the markets.
By Friday, however, it was back at its lowest point against the dollar in 18 months and leading German bankers were warning German taxpayers they would probably not get back the billions they were “lending” Greece.
Sarkozy’s famous victory is less than final — and he might yet regret his showdown with a chancellor of Germany.
ADDITIONAL REPORTING BY GILES TREMLETT IN MADRID AND LIZZY DAVIES IN PARIS
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