Germany plays poker with the euro zone’s future
Commentary: Can Germany’s Merkel’s poker face bluff the markets?

By Jason O'Mahony

DUBLIN (MarketWatch) — The old Chinese curse, “May you live in interesting times”, needs an addition: “May you live in interesting times, but be too terrified to notice”.

These are extraordinary times in Europe, with the post-1945 European integration settlement on the verge of collapse. It’s hard to overstate the stakes, other than to say that while the traditional European method of problem resolution (a million tons of steel hurtling across your border at speed) is not on the table, everything else is.

The collapse and breakup of the euro is now a serious possibility. If it happens, it will almost certainly be followed by explosive currency devaluations in most of the euro zone, followed by huge pressure on governments to introduce protective tariffs and the effective end of the single European market, one of the greatest achievements of post-war Europe.

In short, this is the poker table for serious players.

Then you look at German Chancellor Angela Merkel, who either has icewater in her veins or just doesn’t get it. The problem of the euro crisis has been that, all alone, the markets have kept seeing the euro zone’s stake, and raising it.

Less than a month ago, the latest attempt to restore confidence in the currency bloc, a (nominally) well-capitalised European Financial Stability Facility, supposedly able to bail out almost any EU country having difficulty paying its way, was announced.

The markets pondered it, and then the Greek prime minister, George Papandreou, committed an act of political hara-kiri (for him, anyway) by throwing the wild card of a referendum onto the table. This incensed the French and German leaders, now known to the average Jacques on the European street as “Merkozy”, who basically demanded that if the Greek people were to vote on anything, it would be on whether they were going to stay in the euro or not. Athens backed down and Papandreou resigned to be replaced by a non-political “technocrat.”

Pandora’s box of euros

But the markets had been listening. Merkel and French President Nicolas Sarkozy had opened the political Pandora’s Box by admitting that no, the euro zone was not inviolate, countries could leave. And with that, the markets’ accelerator pedal went down.

Bond rates are rising in Italy (also with a new non-political prime minister following Silvio Berlusconi’s resignation, in part due to his interest in curves other than those on bond rate charts) and Spain (despite a newly elected center-right government with a clear majority). Even Germany is beginning to struggle to sell its paper. A good day’s work, guys!

Now, all sorts of options are being bounced around European capitals and in the media, but all seem to hinge on core features.

The first is the “europeanization” of national debts, in an attempt to offer to the markets a “eurobond” backed by the solid economic power of the euro zone as a whole. In order for this to work, the markets have to be convinced that the whole enterprise is effectively being run by grown ups in Berlin who will keep everyone else’s sticky fingers off the newly replenished cookie jar. The currency bloc’s leaders have to do this while also completing the political three-card trick of getting consent from the people of the euro zone’s 17 members by convincing them that this is not a German takeover.

Difficult? Does Mitt Romney have a hair stylist?

Then there’s THE question: Can the European Central Bank (ECB) become Europe’s lender of last resort, and start letting its printing presses run in an exercise in quantitative easing? This is the one that makes Merkel put on her Teutonic warrior queen get-up and go charging.

The hyperinflation of the Weimar era (and subsequent events of an Austrian moustachioed variety) is burned into the German folk memory, with stories of children needing wheelbarrows to bring money down to the local bakers. Germans were promised that the ECB would be a stern inflation-busting hawkish Bundesbank in all but name, and so the latest proposals are ringing alarm bells across Germany.

Destiny calls

For Merkel, these are the weeks that will not only decide her political future, but her place in European history. Can she bring the German people with her into an effective political union where Germany, if not picking up the tab, is effectively acting as everyone’s rich but stern grandma?

Can she make the massive u-turn on the ECB which just might make the markets finally take the European response to the sovereign debt crisis seriously? Can she convince the rest of Europe to accept a new treaty that will make the others, especially the Mediterranean coasters (in all senses of the word) run their national budgets like Germans? Most importantly, does she actually want to?

Or, will she freeze and be swept away in the economic chaos of the disintegration of the euro, followed very possibly by the European Union itself, going down in the history ebooks as Europe’s Herbert Hoover?

Whatever happens, this is going to be interesting.