The Revenge of Montozy

BERLIN – A few weeks ago, Europe’s Teutonic queen and a dependable Roman technocrat shared a stage in Berlin and showered each other with praise.

Germany, Chancellor Angela Merkel beamed, was watching Italy’s progress with "great respect," and the good work of the Italian administration would surely "be rewarded."

Merkel’s homeland, Italian Prime Minister Mario Monti responded, provided all of Europe with a model of budget discipline and "the best recipe for growth." Through its dedication to market principles and reforms, Germany had become "so splendidly competitive."

"I find so many things wonderful about Italy," Merkel replied, "as I hope the Italian prime minister finds wonderful about Germany. Together, we are richer and stronger than we are apart. And I’ll gladly repeat that I treasure the prime minister’s work."

But it all felt a bit phony. Just that morning the German daily Die Welt had published an interview with Monti in which he had called Germany "the ringleader of EU intolerance."

Monti accused the Germans of playing by one set of rules while imposing another on its weaker neighbors. "Of central importance for Europe is an unconditional respect for the rules," Monti told Die Welt. "If the big countries break the rules — like Germany did in 2003 [by exceeding budget deficit limits] — they can’t expect the small countries to follow them."

Since then, he has challenged one German principle after another, calling for Merkel to pony up and increase its already predominant share of the funds to rescue debt-ridden countries like Italy and Greece. From Germany’s perspective, the dependable technocrat may not be so dependable after all.

How quickly things change. Merkel and her cohorts cheered back in November when Italian President Giorgio Napolitano tapped Monti to replace the buffoonish Silvio Berlusconi. "Super Mario" had made a name for himself as an über-competent EU commissioner from 1995 to 2004, winning broad respect among European leaders. And after Berlusconi — who had responded to Italy’s deepening debt crisis with more scandals than solutions — Monti, the Germans thought, would quietly right the ship with a good dose of German-style austerity.

For a time, he did. He appointed a technocratic cabinet and passed a sweeping 30 billion euro austerity package a month later, with the Italian senate approving the mix of spending cuts, tax hikes, and an increase in the retirement age by a huge margin. Italy’s soaring borrowing costs finally started to come down. Everything was going to plan.

Until he started speaking out.

Although Monti had never been a politician before, he had all the right political instincts. According to James Walston, a professor of international relations at the American University of Rome, Monti is, at heart, a "very political animal." He’s expected to step down for the 2013 elections, but there’s speculation that he might seek the presidency that year. Whatever his motives, he knows how to score points with the people whose support he needs to remain an effective leader.

"There is this very strong sense among a lot of Italians that they have become German poodles, or German dachshunds, or whatever canine metaphor you prefer to use, and Germany is calling the shots," says Walston. "So he has to show Italy and to a lesser extent the world that he’s his own man."

Short of wading into Godwin’s Law territory, there are three things not to do if one wants to stay friends with the German chancellor. And in just two and a half months, Mario Monti has done them all. Let’s have a look:

Rule #1: Don’t tell Germany how to go about its business — especially if you’re from one of those no-good, free-spending PIIGS countries.

The German economy is, by European standards, booming. Unemployment is at its lowest level in two decades, and gross domestic product (GDP) grew by a respectable 3 percent last year. Italy’s economy, on the other hand, is teetering on the precipice and probably poses the single greatest threat to the world economy right now.

And yet there was Mario Monti, telling the Germans it was in their "own enlightened self-interest" to chip in more of their hard-earned euros to save the single currency, which had brought "huge benefits…and maybe [to] Germany even more than others."

He followed that up with a call to double the eurozone’s permanent bailout fund, the European Stability Mechanism (ESM), from 500 billion euros to 1 trillion euros. Predictably, Berlin rejected the proposal, with more than a trace of irritation — after all, much of that extra cash would inevitably come from Germany’s coffers.

"The problems did not emerge in Germany," said Finance Minister Wolfgang Schaeuble. "We are doing more than all the others and while the European unification has yielded great advantages for us, this does not mean that solidarity is a one-way street."

Most egregiously, in December, Monti threw his weight behind the idea that’s guaranteed to draw the quickest and sharpest reaction from German leaders: the issuance of joint debt, known as Eurobonds. And he rubbed salt in the wound by saying, "I believe we have enough arguments to convince the Germans."

Advocating for Eurobonds, which would help Italy’s economy, is one thing. Violating protocol by publically advancing a policy that puts Berlin up against a wall is another. The Germans were not amused. A German government official close to the negotiations, who spoke on the condition of anonymity, said it was "unfortunate" that Monti had chosen to call for an increase to the ESM and that "we have emphatically no interest in Eurobonds."

But the official added that he understood Monti’s political need to distance himself from Germany in order to win popular support at home. "It’s important for him to highlight the one or the other disagreement that he may have," said the official. "He’s politically sensible."

Rule #2: Don’t steal Germany’s powerful friends.

It’s bad enough that Monti was taking a public stand against German orthodoxy. It was worse when leaders around Europe started listening.

Just days after Monti pushed for the ESM to be doubled — and Merkel’s chief spokesman rejected the idea — International Monetary Fund Managing Director Christine Lagarde echoed Monti’s call.

"We need a larger firewall," said Lagarde (in Berlin, no less). "Without it, countries like Italy and Spain that are fundamentally able to repay their debts could potentially be forced into a solvency crisis by abnormal financing costs."

Granted, Lagarde wasn’t calling for a doubling of the fund, as Monti had. But then European Central Bank President Mario Draghi, who had pleased the Germans by insisting that his duty was simply to maintain price stability, agreed with Monti that the fund should be boosted, further irking the Merkel administration and drawing yet another stern rejection from her team. Now there’s even talk of a 1.5 trillion euro bailout fund.

At least Merkel was still able to push through her top priority — a fiscal pact that will compel participating nations to adopt strict deficit limits — at a Jan. 30 EU summit in Brussels. But Monti could claim victory there too; he succeeded in carving out an exemption for countries with crushing national debts — countries like, say, Italy.

Rule #3: Don’t ever try and break up Merkozy.

Much has been made of the alleged romance between play-by-the-rules Merkel and playboy Nicolas Sarkozy, the French president. The centaur-like Merkozy, with the German chancellor’s head and the French leader’s heart, has captivated the world and come to represent renewed cooperation between the sometimes quarrelsome neighbors.

And who came along to break them apart? You guessed it.

In his Berlin appearance with Merkel on Jan. 11, Monti insisted multiple times that Italy had to join with Germany and France in plotting the eurozone’s future. And given Monti’s standing among Europe’s elder statesmen, Merkel had no choice but to open up the former duopoly and invite Monti to a tripartite summit a week later (which the capricious Sarkozy soon canceled). It was bad enough that the Franco-German romance was about to become a ménage à trois. The reality, for Merkel, might be even worse: Merkozy might be supplanted by Montozy.

The problem, according to a Sebastian Dullien, a Berlin-based economist and senior fellow at the European Council on Foreign Relations, is that Merkel and Sarkozy never really quite saw eye to eye on Europe’s central policy decisions. Instead, Sarkozy felt compelled to go along with Merkel or risk ostracism — for lack of another viable ally.

"I never had the feeling that Merkel and Sarkozy were that much on the same page," says Dullien. "I always had the feeling that Sarkozy was keen on keeping the AAA rating, and that his calculation was that the best step to take in order to hold onto that was to follow Germany and to form a coalition with Merkel. If you look at what they decided, it was always what Germany had proposed."

But now, with Standard & Poor’s having downgraded France to AA+ and Monti thrusting himself into the foreground, Sarkozy suddenly has another option — one whose interests are more aligned with his own. France’s borrowing costs, though lower than Italy’s, are nearly twice as high as Germany’s. Joint Eurobonds that would level the playing field hold much more appeal for France than for Germany. Likewise, France’s economy grew at half the speed of Germany’s in 2011, so Monti’s repeated calls for growth measures resonate with France.

"The way of looking at the whole crisis, the French view and the French problems, the French view of spending, is much closer to the Italian one," says Walston. And Italy’s success in winning France over to its side was not lost on the Monti administration. "La Merkel should take notice," a Monti adviser triumphantly told La Repubblica, "that we are now two."

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Still, Monti’s arrival on the scene could help Merkel manipulate German public opinion to her advantage. Though European integration remains popular in Germany, bailouts of the country’s profligate neighbors are not. By adding his respected voice to the mix and shouldering some of the decision-making burden that had previously fallen almost entirely to Merkel, Monti could help remove some of Merkel’s responsibility for unpopular choices in the eyes of German voters.

"She’s caught between two fires," says Walston, "because she has to look after big German banking and European interests at the same time as looking after her electorate. She can use Monti’s pressure in a way to sell her needs to the German people."

For now, Merkel remains the towering figure in Europe, without whose consent little can be achieved. In spite of her increasing isolation, she still has been able to push through her main priorities, culminating in the Brussels fiscal pact. And Germany remains the undisputed economic leader — and, increasingly, bankroller — of the continent.

But Monti holds the card that will keep mighty Merkel from undermining his authority: He is not Silvio Berlusconi. European leaders’ desperate desire to avoid Berlusconi or his allies return to power may be enough to give Monti license to score a few points with Italian voters. "Berlusconi is planning a comeback," says Walston, "and so the rest of Europe is very keen to keep Monti in power."

All told, Walston believes Monti has made life more complicated for Merkel. "If you have a relationship between equals, you’re going to have differences of opinion. If you have a doormat, it’s easy: You just walk on it. Monti’s not a doormat."