Angela Merkel casts doubt on saving Greece from financial meltdown

Ian Traynor, Europe editor

guardian.co.uk, Wednesday 25 January 2012 10.30 GMT

German chancellor speaks candidly to the Guardian and five other leading European newspapers as part of a unique collaboration to explore the EU's predicament

Angela Merkel, the German chancellor, said efforts by the international community to stabilise the situation in Greece had not worked. Photograph: Michael Sohn/AP

Angela Merkel has cast doubt for the first time on Europe's chances of saving Greece from financial meltdown and sovereign default, conceding that Europe's first ever multibillion euro bailout coupled with savage austerity was not working after a two-year crisis that has brought the single currency to the brink of unravelling.

In an interview with the Guardian and five other leading European newspapers, the German chancellor also insisted – against widespread resistance elsewhere in the eurozone and in the UK – that the European court of justice (ECJ) be empowered to police public spending and budget policies of the 17 countries in the euro.

She also called for the eventual creation of a European political union, with many more national powers ceded to a central government, a strengthened bicameral European parliament, and the ECJ assuming the role of Europe's supreme court.

Days before the latest EU summit, which, at Merkel's insistence and evoking scant enthusiasm elsewhere, is to finalise an international treaty between eurozone governments entrenching German-style fiscal and budgetary rigour in all single currency countries, the chancellor admitted having doubts about the strategy she had pursued during the crisis.

"We haven't overcome the crisis yet. Of course, there's Greece, a special case where, despite all the efforts that have been made, neither the Greeks themselves nor the international community have yet managed to stabilise the situation."

Asked about the European response over the past two years, during which Berlin has often dictated terms and encountered strong resistance in Brussels, Paris, and at the European Central Bank in Frankfurt, Merkel said: "Good politicians always have doubts, as a way of constantly reviewing whether they are on the right track." There were no doubts about her aim – to save the euro and preserve the EU. The reservations concerned the means to those ends.

With Europe's biggest ever crisis moving into its third year, the chancellor is facing growing resistance to her key aim at Monday's summit – finalising the "fiscal compact" treaty that is the euro's new rulebook, foreseeing quasi-automatic fines for fiscal sinners, empowering the Luxembourg-based ECJ to sit in judgment of the 17 countries' budgets, and establishing legally binding debt ceilings for eurozone governments.

The treaty would enshrine the German model of fiscal and monetarist rigour as binding on the eurozone, in a move that would, in effect, outlaw Keynesian economics.

As global leaders gathered on Wednesday in Davos, Switzerland for their annual deliberations on the world economy, Merkel, delivering the keynote opening speech, sought to shift the debate away from pervasive austerity and spending cuts to promoting growth and jobs, suggesting that labour laws across the EU might be more closely coordinated.

But the prospects for growth in Europe appear abstract and the gloom was deepened by official British figures showing a 0.2% contraction in the UK economy in the last quarter of 2011, pointing the way to the second British recession in three years. Criticism of the pact and the Merkel policy is getting louder. "A lot of time and energy wasted for nothing," Luxembourg's foreign minister, Jean Asselborn, told Der Spiegel this week. "Issues which have more to do with Germany than with Europe are playing an important role." Last week, a Finnish cabinet minister also attacked the treaty as having more to do with German domestic politics than with saving the euro.

But Berlin looks certain to get its way since it says no new permanent euro bailout fund will be established a year early in July without agreement on the treaty.

Opponents say the pact will do little to stem the immediate crisis. The Germans insist in the medium term it will prevent a repeat of the profligacy that caused the near-collapse in the first place.

"There would be no point in promising more and more money without tackling the causes of the crisis," said Merkel. "Amid all the billions in financial assistance and rescue packages, we Germans also need to watch that we don't run out of steam. After all, our capacities aren't infinite, and overstretching ourselves wouldn't help us or the EU as a whole.

"We will only be able to strengthen our common currency if we co-ordinate our policies more closely and are prepared to gradually give up more powers to the EU. If we make loads of promises about debt reduction and sound budgeting, those need to be things that can be enforced or brought to court in the future. The point of the fiscal compact, after all, is to make it possible to check on those commitments. That means giving our [European] institutions more monitoring rights – and more bite."

Merkel again ruled out pooling eurozone debt – eurobonds – as a quick fix to the crisis, but left the option open should the new euro regime produce results.

"Shared liability is something we will only be able to contemplate once the EU has achieved much greater integration. It will not do as a means to resolve this crisis. That greater integration would involve the European court of justice enforcing controls for national budgets, for example, and much more besides. If we at some point have harmonised our financial and budgetary policy, that will be the time to try and find other forms of co-operation and shared liability."

The new pact is an international treaty between participating governments and not European legislation because David Cameron last month took the highly unusual step of vetoing an EU-wide deal.

Despite the prime minister's blockade and the belief in Berlin that he blundered, Merkel sounded conciliatory.

"I am convinced that Great Britain wants to remain a member of the European Union. Of course, it's never easy for 27 states to hold together … We need to find that balance with everyone time and again, including the United Kingdom wherever possible."

On her "vision" for the future of the EU, though, there is unlikely to be any "balance" struck with No 10 because Merkel's hopes for a Europe united politically under a single government are at odds with Britain's views. Besides, Merkel's project would require substantial transfers of powers to Brussels that would run foul of Cameron's EU referendum law.

"My vision is one of political union because Europe needs to forge its own unique path. We need to become incrementally closer and closer, in all policy areas," the chancellor said. "Over a long process, we will transfer more powers to the [European] Commission, which will then handle what falls within the European remit like a government of Europe. That will require a strong parliament. A kind of second chamber, if you like, will be the council comprising the heads of [national] government."

"And finally, the supreme court will be the European court of justice. That could be what Europe's political union looks like in the future – some time in the future, as I say, and after a goodly number of interim stages."

There was no immediate reaction to Merkel's interview from Cameron.

Stefan Kornelius of Süddeutsche Zeitung, Javier Moreno of El País and Bartosz Wielinski of Gazeta Wyborcza contributed to this report

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