Is the euro doomed? The answer to that question depends on Angela Merkel. As the head of government of the largest and richest country in the European Union, Merkel is looked to by all sides to provide leadership as the sovereign debt crisis ravages the continent. Should she fail to persuade the German parliament to support a €440bn bailout fund for Greece and other eurozone members, the single currency may well unwind.
Analysts at UBS predict that could cost a peripheral country such as Portugal 40-50 per cent of GDP in the first year and a core country such as France 20-25 per cent. As George Soros has warned, the crisis has "the potential to be a lot worse than Lehman Brothers".
Little wonder that, in a recent speech to the Bundestag, the German chancellor declared: "The euro is the guarantee of a united Europe. If the euro fails, then Europe fails." One could add that if Europe fails, Merkel fails. She must persuade both her party and an increasingly sceptical electorate that the cost of saving the single currency is much smaller than disbanding it.
Assuming that the euro survives, it will also fall to Merkel to refashion Europe's institutions for a post-crisis world. She has talked of giving the European Court of Justice the right to punish member states that breach commonly agreed debt and deficit levels. More fundamentally, Europhiles and Eurosceptics alike now believe that greater fiscal union is the only way to save the monetary union.
In the short term, this will entail using eurobonds (allowing Germany and France, for instance, to underwrite the debt of poorer eurozone countries in return for gaining a stake in their economies), and in the long term it demands the pooling of revenues and greater tax harmonisation. It is the beginning of a process that could lead to the creation of a United States of Europe. Those who believe that the dream of "ever closer union" can be salvaged from the present imbroglio are pinning their hopes on Merkel.
Back at home, the former chemist is leading an energy revolution. After the Fukushima disaster in March, she abandoned her long-held support for nuclear power and pledged to decommission all 17 of her country's plants. Germany will become a "nuclear-free" state by 2022. Merkel's move cemented Germany's status as the world leader in renewable energy, but it had more to do with politics than policy. The German electorate is overwhelmingly opposed to nuclear energy - 88 per cent would like to see all plants closed. Indeed, Merkel's pro-nuclear stance contributed to the abysmal electoral performance of her Christian Democrats so far this year; they have lost heavily in the five regional elections held out of seven scheduled for 2011.
She will need to bring similar pragmatism to bear on the eurozone crisis. Contrary to her public declarations, a managed default by Greece appears unavoidable. No one has suffered more political damage from the crisis than she has, but no one could do more to guarantee the future of the EU.
The times demand an extraordinary act of statecraft from the German chancellor. Whether she succeeds or fails, Europe will be changed - changed utterly.
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