Many were hoping for a bold move from Angela Merkel. Instead, all they got from the German chancellor was a plea for time and calm.
Ahead of the World Economic Forum in Davos, there had been persistent rumours that Merkel would announce an injection of as much as half a trillion euros into the Eurozone’s bailout fund. Unable to repay its national debts, Greece is teetering on the brink of default, and Ireland and Portugal are not far behind.
But Merkel said that action just for the sake of reassuring the markets would not guarantee a sounder economy.
“I would like to ask all of you who are here as the representatives of the business community to recognize how democratic governments work and to please take the long drawn- out processes with a degree of acceptance,” she told the audience of thousands of the world’s top policy-makers and business leaders on the first day of a five-day conference in the Alpine resort.
Despite being urged to make more money available by IMF chief Christine Lagarde, Merkel also insisted that plucking billions in guarantees for struggling countries out of thin air would increase not minimise risks.
“Some say that the size of the bailout fund needs to be doubled then if that’s not big enough, others will say it has to be three times as big,” Merkel said. “What we don’t want is a situation in which we promise something that we can’t back up.”
Instead, Merkel proposed the twin solutions of greater integration and austerity.
As many have predicted the imminent collapse of the euro, Merkel said that it was the lack of co-ordination between the European economies that split Europe into the haves and have-nots. “The question is do we dare more Europe? Yes, we dare more Europe." said the chancellor.
She also asked for more painful belt-tightening from Europe’s stragglers, while simultaneously admitting that it would be impossible to reduce the deficits plaguing the continent’s poorest countries “in one go.”
Despite her lack of easy promises, Merkel’s speech received positive, if mixed, reviews.
“I do think there really is a shift in sentiment and perceptions,” Oxford professor Timothy Garton Ash said at the conference “The market sees that Germany is really willing to do what it takes to save the euro.”
Gerald Lyons, global chief economist at investment bank Standard Chartered, welcomed the call for structural economic reform – another of Merkel’s themes – but warned that Europe’s problems are still being misdiagnosed by most of their leaders.
“Europe is focusing on the wrong problem,” he told the Washington Post. “Clearly debt has to be brought down. But Europe suffers from a lack of growth, not a high level of debt. … Basically you need to address the debt problem by focusing on growth.”
Billionaire George Soros, a regular at the forum, was more critical.
“The problem is that the austerity that Germany wants will push Europe into a deflationary death spiral. The economy will contract and tax revenues will fall. So the debt burden will actually rise, requiring further budget cuts and setting in motion a vicious cycle.”
Which of these opinions is closer to the truth will be borne out by the Eurozone economies, which are predicted to collectively plunge into recession this year.