Thank you Germany

Angela Merkel glowers at the Bundestag today (Photo: Reuters)

Alone among EU leaders, Chancellor Angela Merkel goes to tonight’s summit in Brussels with an iron-clad mandate. It is a remarkable moment. Never before – to my knowledge – has a national parliament demanded and held a prior vote on an EU summit accord.

Had this principle been established a long time ago, we might have avoided much of the relentless Treaty creep and EU aggrandizement advanced by secret deals at the Bâtiment Justus Lipsius. Thank you Germany.

Thank you too, judges of the Verfassungsgericht, for giving the Bundestag a veto on EU encroachments on fiscal sovereignty. The court is seemingly the only tribunal willing and able to defend the liberties of European citizens against EU over-reach, and is therefore my supreme court too even as a British citizen.

Dr Merkel has won her vote. She secured an "own majority" for proposals to leverage the €440bn bail-out fund (EFSF) into the stratosphere, with the support of some very sheepish looking law-makers from posturing Free Democrats and Bavaria’s Social Christians.

But what a price she paid. The credibility of her team is shattered. Europe has all but destroyed her, even if she manages to limp on to the next crisis.

As she glowered darkly, speaker after speaker from the Social Democrats (SPD), the Greens, and Die Linke, asked how she could possibly reconcile her plan to leverage the EFSF to €1 trillion or €1.5 trillion (we still don’t know how much) with solemn pledges to the Bundestag just three weeks ago that there would be no such leverage.

"Shameless abuse of the truth," was the verdict of SPD leader Frank-Walter Steinmeier. The government had acted "tactically" at every turn, "misled the people", "held back information", "crossed every red line", brought Europe "to its knees" with botched policies, and lied blatantly about EFSF leverage.

"You came here to say there would be no leverage, not three years ago, not three months ago, but three weeks ago. You denied everything."

"This is a matter of democracy in our country. Trust is the resource with which we all work." (For those German speakers who watched the debate, excuse my instant and loose translation, but I think it is not far off.)

Die Linke (Left) leader Gregor Gysi was electrifying. "It is the arrogance of power," he began, and never let go.

"Every week you come up with a different story about this crisis."

"We were told there would be no leverage and you have reversed everything in a matter of weeks. Now we learn that the 20pc loss will fall entirely on taxpayers. They alone will pay. That is the decision you are taking."

"Why don’t you tell German taxpayers the truth? They are being asked to pay the losses for French banks."

Green leader Jürgen Trittin rebuked Dr Merkel for hiding the true implications of EFSF leverage, particularly the plan to insure the first 20pc of losses on Club Med bonds.

"Why are you shying away from telling the people the truth? You must tell people what this leverage means. You must explain to them what the risk is, and why it is necessary. But you wriggled out of it."

"You came here three weeks ago and said there would be no leverage. This is the sort of thing that unnerves people."

And so it went on, raw red-blooded democracy.

The unpleasant truth is that the EFSF leverage proposals are idiotic, the worst sort of financial engineering, legerdemain, and trickery.

As countless economists have pointed out, it concentrates risk. Germany’s €211bn commitment to the fund is not technically breached but the risk of suffering large and perhaps total loss is vastly increased. Creditor states switch from protected senior status on Greek, Portuguese, or Italian debt to the bottom rung on new slabs of sub-prime structured credit. The bluff might well be called.

The consequence will be to bring forward the downgrade of France and other states. It will accelerate contagion to the core, not stop it.

Why is Germany pushing for such a destructive policy? Because it dares not cross the €211bn red-line that has become totemic in the Bundestag, and because it has for ideological and cultural reasons excluded the one option that can plausibly halt the eurozone crisis – which is mobilizing the full fire-power of the European Central Bank.

It should be obvious by now that euroland needs an authentic lender-of-last-resort. Yes, there is a risk that ECB bond purchases could degenerate into chronic monetisation of deficits. But it is an even greater risk that the EFSF – as proposed – will set off a calamitous chain of events.

Personally, I felt almost swept along by Chancellor Merkel as she pleaded for support to help put Greece "back on its feet again", etc, etc, and warned with pathos that another fifty years of peace in Europe cannot be taken for granted.

But as soon as you think about it, such a claim to idealism is make-believe. Her own government is the architect and enforcer of one-sided austerity policies – without offsetting monetary and exchange stimulus, or demand growth in the North – that are pushing Southern Europe into debt deflation and a downward economic spiral.

It is her own call for bondholder haircuts in Greece that set off contagion from Greece, first to Ireland and Portugal, and then to Italy and Spain. It is her refusal to contemplate a change in the mandate of the ECB – by treaty if necessary – that is now exacerbating the crisis.

Far from preserving the peace of Europe for another fifty years, her policies are more likely to bring about the very mischief and grief she warns against.

So let us take her Rhetorik with a pinch of salt.

Still, a splendid day for German democracy.