Angela Merkel won't let go of the euro purse strings

Once it was the French President, Charles de Gaulle, who always said "Non!" to the British. Now it is the German Chancellor, Angela Merkel, who is saying "Nein!" to the French. Across Europe, the peasants may be revolting against Angela's austerity agenda, but the Frau is not for turning.

Merkel's unenviable function in today's dysfunctional European Union is to take away the punch-bowl just as the party gets going, spoiling the celebrations of the continental Left before Francois Hollande has even settled into Nicolas Sarkozy's seat at the Elysee Palace.

It wouldn't matter to Germany's conservative Chancellor if her French socialist counterpart had been elected by a landslide, rather than squeaked home by the narrowest of margins: the fiscal pact that Sarkozy signed is binding on Hollande too. When he arrives in Berlin next week, Merkel observed, he will be received "with open arms". She said nothing about an open chequebook.

Why does she have the role of party-pooper? For one thing, her colleagues and voters expect nothing less. Volker Kauder, the parliamentary paladin notorious for claiming last year that "suddenly Europe is speaking German", this week again said out loud what his boss is thinking: "Germany isn't here to finance French election promises." Behind the tough talk of austerity, however, is the looming presence of the past. Nine decades after Weimar Germany's great inflation, which reached its climax in 1923, the folk memory is still a factor in German politics.

What is often forgotten about that traumatic prelude to the rise of Hitler, however, is that anybody who owed money did very well indeed. Weimar inflation wiped out debts to the tune of £10 billion (perhaps £10 trillion today), but the German economy was in freefall until a new currency stabilised the crisis and triggered a boom that lasted until the 1929 Wall Street Crash.

Wiping out the debts accumulated by governments, banks and individuals is the real purpose of the "growth" agenda proposed by President-elect Hollande and the motley movement of populists of Left and Right across Europe. But capitalism cannot survive, let alone flourish, in the long run unless debts are paid, contracts are honoured and the rule of law prevails. Socialists, of course, tend to mind much less about the market economy than hard-working families who have savings and investments to lose. Indeed, France's real national sport is epater le bourgeoisie.

The chancellor, whom Germans nickname "Mutti" ("Mum"), stands for old-fashioned bourgeois virtues. While Sarkozy loved to schmooze with billionaires and celebrities, Merkel is much more comfortable with the Mittelstand, the small businessmen and professionals who form the bedrock of her political support.

It is true that the crisis which began in 2008, and still shows no sign of abating, is unusual in that the middle classes, too, had got into the habit of running up large debts - though Germans still treat credit cards with suspicion. However, the growing state of personal indebtedness across Europe has tempted electorates to let their politicians off the hook. It sounds nicer to vote for "growth" rather than "austerity".

And on the Continent the issue is confused by the euro, which obliges stronger economies to bail out their weaker brethren and forces the latter to wear a financial straitjacket that may not suit them. All the fiscal pacts and bailout funds in Europe have not prevented youth unemployment hitting 50% in Spain and Greece, with other eurozone nations not far behind.

Howls of anguish from Athens and Madrid cut no ice in the Berlin chancellery. What will give Merkel pause, however, is tomorrow's (Sunday's) election in Germany's biggest state, North-Rhine Westphalia - a dry run for the federal election next year. The 18 million people who live in this heartland of German industry will deliver a damning verdict on Merkel's stewardship of the economy. Her conservative Christian Democrats are likely to do badly and her liberal coalition partners worse. The rise of the Pirates, a protest party led by geeks who believe internet downloading should be free, indicates that even Germany is not immune to Europe's something-for-nothing culture.

As if this were not enough to keep Merkel awake at night, she must also deal with a startling revelation that goes to the heart of the European project. According to official documents released this week, in 1997-98 the then German chancellor Helmut Kohl - chief architect of the single currency - lied to the German people about Italy's suitability to join the eurozone. Kohl, who dominated German politics for two decades, was warned that the Italians were cooking the books, using one government agency selling gold reserves to another, in order to hide the scale of their debts. But Kohl chose to ignore repeated warnings from his closest aides. For him, the political imperative to include Italy in the eurozone trumped mere economics. Kohl claimed that the French, then led by Jacques Chirac, would withdraw unless the Italians joined too.

This story, which only emerged thanks to the investigative journalism of the magazine Der Spiegel, is especially embarrassing for Merkel because Kohl was not only her predecessor but her mentor, especially on Europe. The toxic impression is that the European Union's riskiest experiment, the euro, was based on phoney figures fed to an unsuspecting public by a cynical elder statesman who cared more about his place in the history books than the long-term consequences.

Merkel, then the environment minister, was Kohl's protege: "That's my girl," he would say. Now the question Germans are asking is: how much did she know about what the old man was up to? The same cover-up happened when Greece joined the eurozone in 2001, by which time Merkel was a leading figure in her own right. And it has continued ever since, with repeated attempts by politicians to mislead electorates. The latter are now deeply sceptical of what they are told.

The likelihood is that by the autumn of next year, Germany will have a new, more Left-leaning coalition, probably still led by Angela Merkel, but incorporating either Social Democrats or Greens. Also on the cards is rising inflation, evoking the usual German angst, and stiffening the German Chancellor's resolve to keep saying "Nein!"

So whatever deal the new Merkel-Hollande duopoly - "Merde", perhaps, instead of "Merkozy" - may seal next week, it will, like the 1997 growth and stability pact or the 2011 fiscal pact, inevitably be a pantomime horse. The two leaders will promise both the structural reforms and austerity favoured by the Germans, and the looser credit, fiscal stimulus and mutualisation of debt favoured by the French. Berlin will sing the praises of deregulation of labour markets, while Paris calls for tighter regulation of financial markets. But the next crisis - a Greek exit from the euro, another failed Iberian bank, an Italian default - will make an ass of the pantomime horse.

Angela Merkel is no Margaret Thatcher, but she is a class act, a professional among amateurs. David Cameron may prefer to be photographed with Barack Obama, but Merkel has been a more reliable ally on the primary purpose of his government: balancing the books. The wave of Left and Right-wing extremism sweeping the Continent will bring these two liberal conservatives together.

They called Bismarck the "Iron Chancellor" and Merkel deserves the title too - or even "Iron Lady". Her conservatism is compassionate, too: German youth unemployment, which used to be very high, especially in her native Eastern provinces, is now less than half the UK level. Messrs Cameron and Hollande can both learn a thing or too from Merkel's readiness to restrain state spending.

The secret of her success, however, is her coolness under fire, an attribute we are sure to see in all its glory in the testing weeks ahead. With the departure of Sarkozy and Berlusconi, she bestrides not only Germany but the Continent: no colossus, to be sure, but an astute, stern and occasionally ruthless matron. Angela is no angel, but in a Europe led by hollow men, there is nobody else of her stature.

— Daniel Johnson is the Editor of Standpoint. standpointmag.co.uk