By Karen Kissane
LONDON: It is not always easy to be German in Europe where the horrors of two world wars are still within living memory and where more than six decades of model citizenship have failed to erase some resentments.
So the remarks of the German Chancellor, Angela Merkel, this week were remarkable. She warned that another half-century of peace and prosperity was not to be taken for granted, and that if the euro failed, Europe failed. ''We have a historical obligation: to protect by all means Europe's unification process, begun by our forefathers after centuries of hatred and blood spill,'' she said. ''None of us can foresee what the consequences would be if we were to fail.''
"We have a historical obligation" ... German Chancellor, Angela Merkel.Credit: AFP
Just in case readers failed to get the drift, Britain's conservative Daily Mail distilled her comments into a headline that evoked ugly spectres: ''German chancellor warns of war if currency fails.'' The newspaper wrote: ''That Germany, the country responsible for two world wars, is raising the prospect of future conflict is a measure of the panic sweeping Europe about the unrest that could follow a collapse of the single currency.''
Immediate fears about the future of the euro have eased following this week's European summit at which a deal aimed at solving the financial crisis was hammered out.
Creditors, mostly banks, have reluctantly agreed to halve Greek debt; the European bail-out fund is to be boosted to €1000 billion, ($1300 billion) in case other countries such as Italy or Spain need to call upon it; and banks are to raise more capital as a back-up.
Markets bounced back on the news but Europe and its single currency are not yet out of the woods. Analysts warn that the risk of economic apocalypse is less likely for the moment but possible in long term. If it is to be avoided, the European Union will have to close the loopholes that allowed this crisis to seed and to fester in the first place.
This might mean creating a central body to oversee the tax regimes, budgets and deficits of member nations - a prospect that will not be well received in some quarters.
Those who manage money call this unifying process ''fiscal integration''. The British Chancellor of the Exchequer, George Osborne, is among those calling for the EU to accept the ''remorseless logic'' that having a shared currency makes necessary. Euro-sceptics have long argued that the shared currency could not work unless members also shared oversight of budgets or a federal budget - a view the current crisis seems to have borne out.
Europe was now facing a wide range of scenarios about its future, the editorial director of the Paris-based European Council on Foreign Relations, Thomas Klau, said - ''ranging from the catastrophic to the positive''.
His vision of the negative extreme echoes Dr Merkel's: ''A disintegration of the euro with consequences ranging from deep depression in the euro zone and beyond to the triggering of a rise in nationalism, xenophobia and aggressive populism, leading to severe instability in the democratic system.''
A more positive scenario he said was that this crisis, as with previous ones, would force a shift towards greater cohesion, ''with the countries of the euro currency building something like a federal system to run their economic, budgetary and fiscal policy''.
He thinks the second scenario more likely and is sceptical about the idea that it would be stymied by popular anti-EU sentiment in countries such as Germany. The fear of loss of identity and control have always been stumbling blocks to union, and the present rescue plan was so long in the making - it took 14 summits an more than 18 months - partly because many of the decisions had to be discussed and approved by individual national parliaments.
''There is a difference between voter sentiments and voter behaviour,'' Mr Klau said. ''Let's look at election results rather than commentary, analysis and opinion polls. In Germany many have voted for parties that are more pro-Europe.''
The main question now is will growth return? This depends on whether markets will support the rescue deal once the fine print is finalised by the end of the year, or whether they will be spooked into freezing lending - most likely by Italy, said Waltraud Schelkle, a senior lecturer in political economy at the European Institute at the London School of Economics.
Italy's debt is running at 120 per cent of its output.
Italy has sold its sovereign bonds very short term, which means it must refinance regularly. ''So the situation will come again and again, and given the sick state of the economy at large, they will always be situations that could make financial markets nervous,'' Dr Schelkle said.
Her worst-case scenario involves the markets turning against Italian bondholders - many of whom are families using them as retirement savings - followed by a run on Italian banks: ''Then, I am afraid, Italy can't be saved [even with the €1000 billion fund]. It's too big. It would be so massive a write-down,'' she said.
She predicts this would lead to much tougher regulation of capital, with people not able to move money across borders so freely: ''We won't have free markets any more.''
Dr Schelkle does not believe the current rescue plan will hold up. She says the European Central Bank must be authorised to step in and buy unlimited quantities of the bonds of troubled countries facing an emergency.
The need for a bigger role for the ECB is a view pushed by the French President, Nicolas Sarkozy, who has been arguing the case to a resistant Dr Merkel, who says Germany refuses to accept such ''non-standard measures''.
Meanwhile, both leaders have mocked the Italian Prime Minister, Silvio Berlusconi, rolling their eyes when his name was mentioned at a press conference this week. Mr Berlusconi is struggling to hold his government together while engineering austerity measures that pass muster with the EU.
But the question of whether Europe's banks should be more tightly regulated has gone largely undiscussed.
Dr Schelkle says regulating capital flows is not being discussed because the timing is sensitive. ''You would at the moment make the markets extremely nervous by showing them the torture instruments.''
But she believes ''it's quite outrageous'' that banks' failings pushed the world into recession in 2008-09, made national budgets blow out more severely and led to greater debt, ''and then they turned around [to troubled countries] and said, 'You are not a good investment.'''
The banks were also aware by 2002 that Greece was in trouble. ''The financial markets knew bloody well that Greece's budget was dodgy,'' she said. ''It wasn't that they woke up in December 2009 to news that they never had. They financed it because no one wants to get out of the bandwagon as long as it runs.
''We left a lot of regulation to banks themselves but they don't understand their own risk models. Self-regulation left banks to estimate their own risk and obviously they couldn't.''
But she, like Mr Klau, believes the euro will survive: ''There is too much invested in it, politically and economically. The euro will be sacrosanct in the end.''