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A Chancellor for Europe and the Euro

Angela Merkel offers Davos her vision for saving the euro with a federal Europe refashioned on German lines.

If anyone can save the euro, it’s Angela Merkel. And the German chancellor made clear Wednesday that she is determined to save the single currency — as long as it is on German terms.

Euro angst dominated the opening session of the World Economic Forum in Davos, Switzerland. Europe’s debt crisis remains the biggest cloud hanging over the global economy. In fact, while in Europe this week, several key forum participants are frantically trying to negotiate the terms of a Greek debt rescheduling to prevent the country from defaulting.

A panel of bankers and economists organized on the margins of the forum by the U.K. law firm Clifford Chance offered plenty of pessimism about monetary union.

“The euro is fundamentally flawed,” said Gerald Lyons, chief economist at Standard Chartered Bank. EU leaders let too many countries with too varied levels of competitiveness join the euro at the start, and those disparities have grown, rather than shrunk, over the past decade, he noted. And Europe’s prescription for the debt crisis — tough austerity in Greece, Portugal and other countries on the periphery — is politically dubious and economically self-defeating.

“Europe is focusing on the wrong problem,” Lyons said. “Europe is suffering from low growth, not from an excess of debt. You need to address a debt problem by focusing on growth.”

Pierre de Weck, head of private wealth management at Deutsche Bank, told the panel that Europe needed to move in the direction of closer fiscal union if it wanted to preserve the euro in its current form. “We either have to move to a eurobond situation or we need to have a number of countries leaving the euro,” he said.

The profusion of doubt ensured a rapt audience when Merkel addressed the forum’s first plenary session late Wednesday. She spoke candidly of Europe’s problems, acknowledging “difficulties and weaknesses as regards competitiveness’’ in a number of European countries, and she conceded that Europe’s complicated political process is painfully slow in addressing those problems. But she insisted that European Union leaders had a coherent plan to address the debt crisis over the next two years involving greater budget discipline, increased competitiveness and closer solidarity among euro members.

“Do we dare more Europe?” she said. “Yes, we’re ready to dare more Europe.” She referred to the so-called fiscal compact that EU leaders agreed in December to forge, whereby euro area members are to commit to tougher fiscal discipline and competitiveness policies as policed by the European Commission, the EU’s Brussels-based executive agency. “We actually have to get used to the Commission becoming more and more like a government,” she said, adding that Germany was comfortable with the idea because of its federal tradition of government.

At the same time, Merkel cautioned that Germany was not willing to foot an ever-rising bill for the euro. Referring to complaints by some economists that Europe’s €440 billion ($600 billion) bailout fund, the European Financial Stability Facility, was insufficient, the chancellor said Germany was willing to show solidarity with troubled euro countries but would not make promises it might not be able to deliver. She also insisted that it was for other countries to raise their competitiveness to German levels, not for Germany to lower itself to their level. The latter scenario would leave a Europe that might be a nice vacation destination, “but we will not be able to provide for the prosperity of our people.”

To Lyons, Merkel’s remarks suggested a desire to push toward greater European political integration without saying as much, and riling German voters — “a United States of Europe by the backdoor,” as he put it. The big flaw in her vision is the continued unwillingness to address the euro area’s internal imbalances. A hyper-competitive Germany will have to either consume more or transfer resources to poorer parts of the euro area to keep the single currency together, he said.

On the day, however, most of the audience was willing to overlook any inconsistencies in the German approach.

“Each time I hear Angela Merkel, I come away more impressed,” said John Chambers, the CEO of Cisco. He was among a group of executives who met privately with the German chancellor before her address, and he praised Merkel for candidly addressing Europe’s economic problems.

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