Analysis

By Paul Taylor

6 Min Read

BRUSSELS (Reuters) - The battle for Europe will be won or lost in Germany.

On some days recently, it has looked like it might be lost. But that is to underestimate the deep German commitment to the success of European integration based on the rule of law.

If the European Union falls apart, it will likely be due to a return of nationalism and a refusal by the French, British and Dutch to share more sovereignty, rather than to German insistence on fiscal discipline and respect for the rules.

"If the euro fails, then Europe fails," Chancellor Angela Merkel has repeatedly warned parliament.

The aftermath of the euro zone's ugly all-night summit on the Greek debt crisis that ended on July 13 with a deal on stringent, intrusive terms for negotiating a third bailout has sent shockwaves across Europe, especially in Germany.

It was the second time in weeks that EU leaders had clashed over fundamental problems they seem unable to solve, after an acrimonious June summit on how to cope with a wave of migrants - many of them refugees from conflict - desperate to enter Europe.

And it has prompted intensive head-scratching in Berlin about how to strengthen European institutions and underpin the euro more durably - an intellectual ferment unmatched in most other EU capitals.

"When you tour European countries, there aren't many that are thinking as hard as Germany about how to make an integrated Europe work better," says a senior German official.

Perhaps due to its World War Two history, Berlin is more open than most EU nations to offering shelter to war victims and accepted the largest quota of asylum seekers.

Nor was Merkel as tough as creditors such as Finland, the Netherlands, Latvia, Lithuania and Slovakia in insisting on humiliating conditions for any further assistance to Greece.

Yet like all leaders, Germany cops most of the blame. And due to its past, that is often laced with references to the Nazi tyranny that make present-day Germans cringe.

That outcry was compounded when German Finance Minister Wolfgang Schaeuble breached a taboo by suggesting that Greece should leave the euro zone, at least temporarily, if it could not meet the conditions.

After decades of trying to be an unobtrusive team player in Europe or co-steering integration through the Franco-German tandem, Berlin was catapulted into an unwelcome solo leadership role by the euro zone debt crisis that began in 2010.

That extra burden of responsibility, due more to French weakness and British indifference than Teutonic ambition, has weighed heavily on Germans who fear it means others trying to pick their pockets without doing their own fair share.

Keynsian economists excoriate Germany's export prowess and domestic frugality; southern Europeans resent its prescription of harsh austerity policies; the Americans, British and French deplore its refusal to become more of a military power; and the French lament its reluctance to pay for "more Europe".

The firestorm of criticism that has rained down on Berlin since the Greek debt deal has triggered a mixture of self-righteous defiance, soul-searching and a quest for new solutions among the German establishment.

Unsurprisingly, the debate is mostly focused on how to ensure better respect for agreed fiscal rules and economic policies rather than how to rebalance current accounts or share wealth or risk between richer and poorer areas of the euro area.

Germans may consider the EU, in the words of ex-chancellor Helmut Kohl, a community of destiny ("Schicksalsgemeinschaft"), but most don't want it to become a community of liability ("Haftungsgemeinschaft").

The government's council of independent economic advisers, in a weighty 58-page special report last week, proposed an orderly insolvency mechanism for states in the euro zone leading to an exit from the currency area "as a last resort".

The panel also called for adding new padlocks to the EU treaty's "no bailout" clause to exclude any transfer of liability from one member state to another, and ruled out any joint euro zone budget or common unemployment insurance benefit.

"In a currency union, the basic rules must be adhered to and for this reason the exit of a member state should not be taboo, for otherwise partners are susceptible to blackmail," council member Lars Feld told reporters.

There is, however, more creative thinking afoot, even in such bastions of orthodoxy as the German Finance Ministry.

Schaeuble, a lifelong European integrationist uneasy at being fingered as the man who tried to force Greece out, let it be known via the magazine Der Spiegel that he could imagine a finance minister for the euro zone under European parliamentary supervision and with his own budget.

Those ideas are olive branches to France which wants a stronger economic government for the 19-nation currency area, a euro zone parliament and a fiscal shock-absorber to support countries that hit on hard times.

Schaeuble's ministry denied a report in the conservative Frankfurter Allgemeine Zeitung that he had proposed stripping the European Commission of key powers to regulate competition and the EU single market.

His concern is to put a body less susceptible to political influence than the Commission in charge of applying the bloc's budget rules - a swipe at Commission President Jean-Claude Juncker and his Economics Commissioner Pierre Moscovici, seen as too soft on Greece and on France.

German officials are open to the idea of a specific parliament for the euro zone to make decisions more democratic - either a sub-set of the existing European Parliament or a hybrid of the EU legislature and members of national parliaments.

Typically for her cautious leadership style, Merkel is observing and possibly encouraging this debate to ease pressure from the Greece crisis, without showing her own preferences yet.

That may come in October when EU leaders discuss a report by Juncker and the heads of other EU institutions for strengthening the governance of the euro zone.

Writing by Paul Taylor; editing by Ralph Boulton

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