The euro dodged another bullet with the Sept. 12 decision by Germany’s constitutional court not to block the creation of a European Stability Mechanism, the latest just-in-time measure by the Continent’s leaders to save the currency. That’s good news, but it’s not enough.
The constitutional court placed a heavy condition on its approval of the ESM’s ratification by Germany. Any action by the fund that would increase German liability, beyond the country’s €190 billion capital commitment, would now require German parliamentary approval. That’s a high hurdle that German Chancellor Angela Merkel will try to avoid because her party has proved reluctant to make such politically unpopular moves. If the €500 billion fund doesn’t look big enough at any point, that will perpetuate uncertainty in financial markets over whether Europe will do what’s needed to underwrite Greece, Italy, Portugal, or Spain.
Merkel and other German leaders must start making it clear to citizens why rescuing other economies would be in Germany’s national interest—a case they have failed to make effectively so far. They have a duty to explain how the euro has expanded markets for German exports in Europe and created jobs at home. They must tell Germans that those markets would shrivel and jobs would disappear if the euro area broke up. And they must explain that, should the euro disintegrate due to Germany’s reluctance to foot the bill, the resulting rancor would inflict lasting damage on the European Union itself.
By now, the bad-Greeks-virtuous-Germans narrative is so entrenched that even a frank, determined message from Merkel might not work. If it doesn’t, she should call a referendum on whether Europe’s largest economy wants to further the EU’s integration in a way that will ensure the euro’s long-term survival.
A referendum on Europe would delay an end to the prolonged crisis, and it would be risky—history shows such referendums can be lost, even in such pro-European countries as France, Ireland, and the Netherlands. It would require an act of great political courage for Merkel to call one, given that failure could kill her chances of reelection next year.
Yet the risk that the crisis will deepen through the next year presents an equal threat to Merkel’s election prospects. She is more popular than her party precisely because voters think she has handled the euro crisis well, helping Germans to escape largely unscathed so far. If that changes and the crisis spins out of control, she could lose the election—and go down as the German chancellor who lost Europe.