Can the iron frau prevail and become the Lincoln of eurozone?

However, the more onerous questions remain. The EFSF fund base of 440 billion euros and spending power of 750 billion euros will not be nearly enough to provide a sufficient bail-out for the eurozone sovereign debt crisis that engulfs Greece, Ireland, Portugal, Italy and Spain.  

The estimated European debt black hole is 2-3 trillion euros.  The EFSF alone, without further mandate to leverage itself 4-5 times, has no chance of stopping what US Treasury Secretary Tim Geithner called “the threat of cascading default, bank runs and catastrophic risk”. That eurozone abyss will most likely to spread to the US and the rest of the world by year end, tanking asset prices, currency values, wages and even oil prices. A market meltdown is feared and global deflation and recession will ensue – and it’s likely to be a long and stubborn one. The bottom line is the effective size of the EFSF has to be enlarged to at least 2 trillion euros. Short of that, the EFSF will be just a stop-gap measure that makes little dent in the overall debt crisis situation.

At the front and centre is the “Iron Frau” Angela Merkel, voted the world’s most powerful female leader for five consecutive years (2006-2011) by Forbes magazine. In August of this year, she saw the support for her coalition plummet to 36 per cent, while her opposition got a 51 per cent nod.

Merkel recognises the direst consequences of inaction to push for an effective financial rescue facility and mechanism by Germany, which is the largest contributor to the EFSF. Ironically, she is facing fiercer objections on the issue within her own coalition than from her opponents.

Germany’s opposition Social Democrats and the Greens have promised to support the package. But the authority of the coalition will be greatly undermined if she cannot deliver a “chancellor’s majority” based on her own supporters. This vote may be the determining factor in her political survivability.

To nobody’s surprise, policy-makers everywhere are “focused on their own internal restraints” at the expense of collective results.  Even the fate of an empire depends on the outcome of internal struggles. While most people agree on the abstract picture of the enormous trouble in which we are in, not many can agree on the practical issues and approaches on how to solve it.

Meanwhile, as the government is wobbling, the German business community has issued an appeal to the German parliament to vote in favour of the eurozone crisis measures. In such an appeal, they describe the European monetary union as facing “a dramatic endurance test” and urge the Bundestag to vote for the legislation. Many people in the know remark that the unusually outspoken intervention of the private sector stems not only from fear for the survival of the euro, but also the survival of Merkel’s coalition government if the backbench rebellion is not stopped in its tracks.

Some European think tanks have started talking about a “European debt union” that implies that the eurozone should agree to a collective guarantee of the borrowing member nations worth up to 60 per cent of their individual annual national outputs. Others suggest the involvement of the European Investment Bank (EIB), which was set up in 1958. The bank is owned by the EU nations, is an AAA borrower and has subscribed capital of 232 billion euros. They suggest that the EFSF together with the EIB could do a European “twist” similar to the recent Ben Bernanke US bond market “twist”. This option seems more attractive to an increasing number of parties as it attracts less political hostility than the expansion of the EFSF itself.

No matter how we look at it, there is much to ponder. This is a real mess of epic proportions, and will take time to be addressed.  But time is not what the world has. The debt crisis gets worse by the day while politicians are quarrelling.

Ben Chu of the UK’s Independent newspaper offers an interesting analogy to Merkel’s predicament. He quoted the American president Abraham Lincoln who expressed his thoughts on the origins of the American Civil War. “Both parties deprecated war, but one of them would make war rather than let the nation survive, and the other would accept war rather than let it perish, and the war came,” said Lincoln in his second inauguration address.

Ben Chu admitted that to call the anti-eurobond Europeans the equivalent of the Confederates might be a stretch. But he contends that the eurozone debt crisis measure echoes the American Civil War. The Civil War, he says, was a conflict about where the appropriate balance lay between the rights of individual states and the power of the federal government; whereas the eurobonds battle is a struggle between the autonomy of European nations and the needs of the eurozone as a whole.

While Germany is not the only country that decides on the EFSF’s role as a crisis resolution mechanism, all the 27 countries must vote independently. But just like the one vote the United States holds at the UN and other international organisations, it is the one vote that counts the most.

No one knows with certainty if Merkel will prevail and take the first positive step towards the turning point for the eurozone, and the rest of the world economy. But she does not get her nickname “Iron Frau” for nothing. As a competent leader, she knows that usually there is no reward for pre-emptive measures, but she must have been well prepared for the battle. As always, an empire can be built by the courage and foresight of one person. It is history in the making.