Will Europe achieve a solution at summit?

BERLIN -- Greece is near bankruptcy, Italy careens toward fiscal catastrophe and the heralded currency union called the eurozone looks increasingly fragile. One country more than any other — Germany — is being called on to save it.

But will it?

European leaders gather in Brussels today and Friday to come up with a long-term solution to an alarming debt crisis that could evenutally destroy the euro currency and could even take down the European Union.

Hanging over their heads is a warning from Standard & Poor's Ratings Services that most of the nations that use the euro — including stable Germany and France — face a 50-50 chance of a credit downgrade if the situation does not improve. A downgrade would increase borrowing costs for the countries, further hampering the EU economy.

The nations of the eurozone, the 17 countries that use the euro as currency, have been pleading with Germany to use its financial strength to assume more responsibility for the crisis.

"There's an expectation that (the Germans) are leading the way, that they have to do it," said Almut Möller, a political analyst for the German Council on Foreign Relations. "Who else if not the Germans?"

But Germany is not keen on some of the solutions, and for the first time in decades is resisting European opinion and raising old fears about whether it seeks to work with Europe or dominate it.

"We will meet (in Brussels) as Europeans and take those decisions that we consider to be correct," German Chancellor Angela Merkel told reporters this week, refusing to elaborate.

As the largest economy in Europe, Germany appears to have shifted from a decades-long posture of largely going along with the ideas of the European Union elite in France, Belgium and the United Kingdom. The Germans now see themselves as different from their neighbors, wiser even, and are assuming an assertive stance that befits the nation's size and stature.

That has not sat well with nations that saw the EU as a way to bind Germany within Europe and put an end to the centuries-old conflicts for predominance that mark Europe's history.

Recent animosity against Germany has become so vocal that French Prime Minister Francois Fillon felt the need to call for an end to "Germanophobia" in debates about the debt crisis and warned that President Nicolas Sarkozy, "must not take lessons on patriotism from those who think they are defending our national interest by caricaturing our German allies."

The vitriol and shifting alliances will be the backdrop in Belgium, where heads of state will either agree on a way to resolve the crisis or further jeopardize the euro's 12-year run as a currency and stymie dreams of a United States of Europe. "The euro crisis is transforming the balance of power in Europe," said Charles Grant, director of the Centre for European Reform in London. "Germany is emerging, for the first time in the EU's history, as the unquestioned leader."

All eyes on Brussels

The summit in Brussels, which could start Thursday with a dinner meeting, is being watched by banks, governments and investors whose fiscal futures may hinge on whether Europe's political leaders, who must answer to restive citizens at home, can agree on the way out of the debt crisis.

There are signs of a consensus being reached. On Monday, Sarkozy and Merkel jointly called on all 27 EU nations to agree to one solution: accept more oversight of their budgets by some central authority, which in effect means surrendering some national sovereignty to EU auditors. They want "automatic and immediate" penalties on countries that overspend, something that has never been enforced because politicians say their publics would throw them out of office over it.

That has happened. Every government that succumbed to pressure from the EU and finanicial markets to slash spending has fallen. The latest was Spain's socialists, who were preceded by the longtime government coalitions that led Ireland, Greece, Italy and Portugal.

The lion's share of bailouts came from Germany, Europe's wealthiest nation. While Merkel has pledged unequivocal support for keeping the eurozone intact, she's become increasingly strident on what her government will and won't do.

She has rejected proposals to create a new European bond, because Germany would be on the hook to pay more than anyone else should it fail. She has refused to allow more intervention by the European Central Bank, which some insist should be used to guarantee more loans from private lenders to debtor nations that must pay impossibly high interest rates because of worries they won't repay the loans. She has said that fiscal discipline is the way out, not more intervention.

Her refusal to budge has earned her the nickname "Frau Nein" in the European press. But her stance is in line with most Germans, whom polls show are tired of seeing their tax dollars spent to save neighbors to the south.

Germans are realizing that the price of saving the eurozone might be too high, and it's no longer necessary to pay for its truculence of more than a half-a-century ago by playing along, analysts say. Having torn the continent apart in two World Wars, German leaders for decades followed the lead of France and the United Kingdom on economic affairs, even though its economy exceeds all others in Europe. But the debt crisis has prompted a new assertiveness.

"This feeling of guilt plays a much smaller role in German politics right now than it did 10, 15 years ago," said Carsten Brzeski, an economist at ING.

Hopes for unity

The European Union as an idea came about in the aftermath of World War II, when the continent was rebuilding its cities and economies and looking for ways to prevent another such conflict. The aim was to create a body of laws and institutions to constrain aggressors and promote economic cooperation and improved standards of living.

The European Commission, an executive body, the European Parliament and the European Court of Justice were established; then came further integration with the introduction of the euro in 1999. Seventeen of the EU's 27 members ditched their longtime currencies for it.

But it was never quite clear how 17 budgets and political climates could work as one, and in key respects they have not. While Greece borrowed, Germany saved. Portugal and Spain used the AAA-credit rating of the euro to build highways and airports and boost government hiring. Italy did the same, and Irish banks lavished loans on developers who failed in a real estate crash, taking banks down.

Attempts to slow the spending were resisted by government leaders who faced voter anger at the ballot box and in the streets if they cut benefits or raised taxes. EU laws and controls turned out to be largely powerless to do anything about it as EU supporters worried that pushing individual nations too hard would break up their beloved union.

Aside from opposing measures it considers financially unsound, Germany is scolding other Europeans for a poor work ethic, bloated governments and overspending. Possessing a work ethic that has helped make their country an economic powerhouse, Germans say they're tired of bailing out what they see as shiftless populations.

"I don't think it's fair for us to pay for other countries," said Thomas Lohmüller, 48, of Berlin. "If we pay too much, we will find ourselves with our own financial problems."

An uncomfortable role

Such sentiments, as well as the refusal to budge, has put Germany in an uncomfortable yet familiar role as Europe's villain. From Greece to England, in newspapers and on talk shows, anti-German sentiment is on the rise. The chiding is sprinkled with references to Germany's past aggressions.

Arnaud Montebourg, a leading French Socialist, accused Merkel of "Bismarck-style" policies, referring to the German chancellor who crushed France in the Franco-Prussian War of 1870. Francois Hollande, the French Socialist Party candidate for president, suggested in a French newspaper that Sarkozy was bending to German might and a return of German domination of Europe.

"We don't want to be like the Germans, and the Germans don't want to be like us," he said.

But Jan Burdinski, a political consultant in Berlin, says German intransigence on some financial ideas stems from its struggles to get to where it is now by instituting practical government and market reforms that other Europeans avoided.

"Germany passed social security and labor market reform, which was painful but necessary," he said. "The retirement age was raised to 67, while Greeks retire at 55. That leaves us with very little tolerance for the demonstrations in Athens."

That pain of structural economic reform is still very fresh for many Germans.

After the Berlin Wall fell in 1989, the country had to reintegrate into West Germany an East Germany that after decades of ruinous rule under the Soviet Union had no real economy or industry, and a people who needed immense amounts of welfare to survive the transition from communism to capitalism.

The effort has continued for 20 years, much longer than German leaders said it would. And German see a analogy to the EU.

"There's no change in the direction of the money; it's all flowing in the same direction," said Bert Van Roosebeke, a Center for European Policy economist. "People say, 'What's the point of giving them money, it doesn't really help.' Some people say it makes them lazy."

Propping up the east is unpopular, but there is no talk of ending it. Beyond German borders, though, feelings harden. "It's …different if you have to transfer considerable amounts of money from Germany every year to Greece, for example," said Roosebeke. "

Nor do they want the European Central Bank to assist debtor countries. Again, German history is the reason. "All Germans are afraid of inflation: They had this experience with the extreme hyperinflation here, and the Bundesbank (German central bank) is the Holy Grail," said Van Roosebeke.

Merkel will face enormous pressure to relent, because experts say Germany can't afford to see the euro go. The Federation of German Wholesale, Foreign Trade and Services reported that German exports this year will exceed $1.4 trillion for the first time. . "Germany lives on its exports," said Brzeski. "And 40% of all German exports go to eurozone countries. It's cold economic interests.

"If Germany would like to play a more important role at the global stage, they need Europe," said Brzeski. "If you really want to talk to the president of the United States at the same level or to the president of China … you can't do it anymore as the French president or German chancellor."