As Europe struggles to reverse a plunge in financial confidence, the world waits for Germany’s chancellor, Angela Merkel, to make a fundamental choice. She, more than any other European politician, will have to either summon the leadership to rescue the euro or concede that the political will is not there.
Mrs. Merkel, 57, faces far-reaching decisions about how to deal definitively with the debt crisis in Europe and, more immediately, whether to allow Greece to default or even to leave the currency union. American officials fear that if she does not act more decisively, bank lending could freeze up and the result would be another sharp financial downturn on both sides of the Atlantic.
Fears of a worsening debt crisis slammed European stocks on Monday, especially shares of French banks, forcing the French government to declare its support for its three largest financial institutions. The turmoil added to worries that the Greek crisis would prove difficult to contain without more robust action from Germany and, ultimately, its taxpayers.
The project of European integration, which began in the difficult years after World War II, is also on the line. If Greece were forced to abandon the euro, as more and more voices on the German right are demanding, it would be a jarring setback for solidarity on the Continent.
Critics say Mrs. Merkel has focused too much on protecting her political standing inside Germany, placing her position as chancellor above the need for bold, risk-taking leadership to rescue the European currency zone. But that would mean sinking more German money into an ever-deepening economic union that voters have shown an antipathy for.
Her governing coalition is already splintering over the Greece bailout, and her party, the Christian Democratic Union, has suffered setbacks in state elections, including this month in the state of Mecklenburg-West Pomerania, where her parliamentary home district is located. Her father died in the stretch run heading into that election, adding personal anguish to a politically fraught moment.
Mrs. Merkel’s efforts to please both sides on the question of the debt crisis — through stern talk about Greece’s failure and profligacy on the one hand and a series of conditional debt guarantees to prop up Europe’s problem child on the other — have succeeded in ultimately pleasing neither.
Supporters argue that Mrs. Merkel has worked in a typically low-profile, methodical fashion to make the best of a difficult situation, winning passage for unpopular bailouts while wringing greater fiscal responsibility from the most heavily indebted nations.
The resignation Friday of Jürgen Stark, a German member of the executive board of the European Central Bank, and the second significant German figure at the bank to leave its governing council this year, offered a window into the intensity of German opposition to the steps Germany and the central bank have already taken in bailing out the weaker southern nations.
“The chasm between what is needed in terms of economic policy and what is possible in terms of domestic politics and party politics has widened,” said Cornelius Adebahr, a Europe expert at the German Council on Foreign Relations in Berlin. “She needs to show stronger leadership, but so far she hasn’t even revealed in what direction she really wants to move.”
Events appear to be forcing Mrs. Merkel to tip her hand. With the latest market assault this week on French financial institutions, the spillover from the debt crisis has now reached the German border. With first Italy and now France affected, problems once dismissed as confined to the distant periphery of Greece and Portugal have arrived at the core of Europe, and with them unavoidable questions about the continent’s future.
President Nicolas Sarkozy of France, her buoyant, antic foil, hopes to draw Mrs. Merkel into deeper commitments to an economic government for the currency zone, once again making France and Germany the motor of European integration that the two countries have been since their reconciliation after World War II. And if France’s struggles are not enough to prod Germany and its phlegmatic leader to take bold action, analysts say, it is likely that nothing will.
“We’ve been pretending for a year and a half that the Greek crisis could be solved this way, but it’s not the case and this has created uncertainty,” said Guntram B. Wolff, deputy director of Bruegel, a research organization based in Brussels.
The latest volatility and vulnerability in European markets may well mark the end of Mrs. Merkel’s efforts to straddle the fence between shielding Greece from default and avoiding an irrevocable step toward deeper economic and fiscal union between the euro zone countries.
The prolonged state of confusion and uncertainty may be as bad or even worse than the underlying problems themselves.
“If they would agree on a specific solution, say to the default of Greece, I would see a relatively low likelihood that the euro zone would also default or be destroyed,” said Michael Schröder, head of the research department of international finance at the Centre for European Economic Research in Mannheim, Germany. “What’s really a danger is this chaos which we have at the moment.”
To observers outside Germany, the stern chancellor appears strong, but unwilling to act decisively. Inside Germany she sits atop a fractious and increasingly unreliable coalition of three parties — her Christian Democratic Union, the Christian Social Union of Bavaria and the pro-business Free Democrats.
France, as a presidential republic with a majority party in Parliament, has fewer domestic political problems than Germany, with its federal system and negotiated coalitions. But Mr. Sarkozy knows that he cannot move without Germany. Much as the two leaders do not like each other and have radically different personalities, Mr. Sarkozy has sought to ensure that France and Germany move as one, and that he is outwardly supportive of Berlin.
Much hinges on getting all 17 nations in the euro zone to ratify the decisions of July 21, as the French Parliament has done, which includes an increase in the bailout fund and an expansion of its powers. Those decisions would already mark a shift in Germany’s harder-line positions on the euro.
An expanded European Financial Stability Facility would be able to act as a kind of bank, supported by all the members. It would be a significant step toward using Europe’s collective clout with debt markets to rescue countries with much weaker standing.
Dedicated supporters of the European project agitate for a centralized fiscal union, more like the United States, to replace Europe’s current hybrid structure, in which member countries use a common currency even as they determine spending and debt levels on their own. But it is no longer clear whether Mrs. Merkel can even muster the votes to pass the Greek bailout deal reached in July, much less win backing for bold new steps.
In recent days, many of Mrs. Merkel’s conservative and free-market allies in Parliament and even respected German economists have grown ever harsher in their condemnations of Greece. The drumbeat from the right to not only cut off aid, but indeed force Greece out of the euro zone, has grown ever louder.
Eurobonds — issuing common European debt that any member of the currency zone could tap — is one popular solution among European Union officials in Brussels.
But analysts say that if forced to choose, the Free Democrats in all likelihood would vote no on them, a parliamentary defeat that could well bring down her government.
“That,” Mr. Adebahr said, “would be the end of the road.”