McManus: Merkel intent on keeping Eurozone united

Silvio Berlusconi, Italy's impossible prime minister, has committed almost every sin that modern politics affords. He entertains barely-of-age girls as overnight guests and brags about it. He appoints business cronies and television starlets to government jobs. He's under perpetual investigation for corruption.

But voters in Berlusconi's conservative base have always seemed willing to forgive him — until now. The prime minister survived a close vote in Parliament last week, but the talk in Italy is increasingly of how soon he will fall. Why, after all that's come before, have Italians finally lost patience with Berlusconi? In part because he recently picked the wrong target to insult.

In a wiretapped conversation reported a few weeks ago, Berlusconi described Germany's chancellor, Angela Merkel, with a phrase too vulgar to be printed in this newspaper but that meant he considered her too unattractive to invite to his bed.

Bad move. Italy, whose government debt is 120% of its gross domestic product, needs Germany's help — and Merkel's protection — to avoid a run on its bonds. "We're all hoping the Germans can figure out a way to get us out of this mess," an Italian banker told me recently.

It's not just Italy that finds itself needing Merkel and the Germans. Greece is already in a state of economic catastrophe; Spain and Portugal are on the brink. And Europe's economic crisis has spread far beyond its inefficient southern economies to the banks in northern countries, such as Germany and France, that are holding those governments' no-longer-reliable bonds. If banks in Frankfurt and Paris begin to fail, the continent could slide into another recession — and take the U.S. economy with it.

That has made Europe's crisis bigger but, oddly enough, easier to fix, with considerable help from Merkel and her country. When it looked like a matter of bailing out feckless Greeks, Italians and Spaniards in their sunny vacationlands, German taxpayers understandably objected to paying the bill. But now that the problem has escalated into a crisis that could topple their own banks, the Germans and their cautious chancellor have changed sides and committed themselves to big, fast action, including an expanded European Financial Stability Facility fund to recapitalize the banks. Roger Altman, the former No. 2 in President Clinton's Treasury Department, has dubbed the idea "EuroTARP," after the U.S. Troubled Asset Relief Program. Like the American version, it's likely to be expensive and unpopular — but also necessary and, with luck, effective.

Merkel's decision to act has had political implications far beyond the financial technicalities. The German leader had to choose between two stark alternatives: to make the Eurozone of 17 countries that have adopted a single currency a closer, more integrated economic unit, or to begin working on an orderly breakup. She opted for integration. "The euro is the guarantee of a united Europe," she told the German Parliament last month. "If the euro fails, then Europe fails."

In the meantime, the European Union will have to make difficult choices about whose money goes into the stability fund and who will be allowed to draw money from it. (Imagine what it would have been like to launch TARP if every state legislature had been allowed to weigh in.)

Merkel and French President Nicolas Sarkozy have made a great show of working as a partnership, but it's clear that Germany — the continent's biggest healthy economy and the only one that can really guarantee new financing — is in charge. The Economist recently printed a cartoon that showed Merkel driving a muscular BMW motorcycle, with Sarkozy sitting glumly in the sidecar.

Originally, the euro was supposed to limit Germany's economic power by making it merely one of 17 partners backing a single strong currency. Instead, the Eurozone's weakness has forced Germany to lead, and forced France and others to accept that Berlin is in charge. Soon there will be tougher fiscal rules for governments in Paris, Rome, Madrid and Athens — and they will all need to pass muster in Berlin.

Americans have a stake in their success. A European recession could push the U.S. economy into a double dip. And U.S. banks aren't immune from the European disease. It's estimated that American banks hold more than $600 billion in government bonds issued by the PIIGS — Portugal, Italy, Ireland, Greece and Spain.

A successful Europe is good for U.S. foreign policy as well. When European countries feel prosperous, they're more able to contribute to joint actions abroad, such as the war in Afghanistan or the bombing in Libya. If Europe is divided and poor, our allies may not be as helpful as we'd like.

In an earlier era, Americans might have found some comfort in Europe's troubles. We might have enjoyed watching supercilious foreigners find that their political and economic systems could be just as dysfunctional as ours. Back in 2008, Europeans enjoyed pointing fingers at Americans for dragging the world into a slump. We may have had subprime mortgages; they have entire subprime countries.

But globalization, which was supposed to make us all rich and happy, hasn't merely fallen short of that goal. It's made us all mutually vulnerable and mutually worried. It's even robbed us of the pleasure of an old European emotion: schadenfreude.

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