How much did German Chancellor Merkel give up at euro summit?

Joachim Löw, the coach of the German soccer team and, Angela Merkel, head of the German government, both suffered defeat Thursday night – but only one of them conceded the setback.

“The better team won,” Mr. Löw said after his side was kicked out of the European Championship semi-finals by Italy. Chancellor Merkel, however, rejected all suggestions that she had bowed to pressure from her fellow leaders at the latest European summit in Brussels on Thursday and Friday.

But the headlines back in Germany said otherwise.

“The Night Merkel Lost” is how Spiegel Online put it, and “Merkel bows to Brussels" was the take of tabloid market leader Bild. What they refer to is the result of a 13-hour marathon meeting  at the European Council in the Belgian capital, in which Merkel found herself increasingly isolated with her tough stance against softening the rules for helping EU economies suffering from the European debt crisis.

Particularly Italy and Spain had made clear that they wouldn’t leave the table without anything to write home about. What they got was hailed by European leaders as a breakthrough. The European Stability Mechanism (ESM), the new bailout fund for the eurozone, will now be buying bonds of countries in economic difficulties, like Spain and Italy, in order to prop up demand and thus keep the interest rates down. And it will do so without special conditions attached, like austerity measures or fiscal discipline, something other countries like Greece or Portugal, who already received bailout packages in return for harsh and highly unpopular cuts in public spending, will certainly notice. The ESM will also be authorized to give money directly to European banks struggling with debts – a big problem in Spain right now. Until now the rescue fund could only transfer money to governments which in turn would distribute it among banks, and again this aid was linked to certain conditions. Not any more.

“We remain within our approach so far,” the chancellor insisted after the summit, facing a vote to ratify the ESM in the German parliament only hours later. “The approach is: help and trade-off, conditionality and control. We have remained true to our philosophy of no help without trade-off."

That is not how it is seen at  home. “Merkel crossed several red lines at the summit,” says Mark Schieritz, economic editor of Die Zeit, Germany’s influential liberal weekly. “Consequently, she is seen as the loser of the summit, and the southern Europeans as the winners. This is a first.”

Merkel did not give in all the way. The capitalization of struggling banks through the ESM is going to be supervised by an independent control authority yet to be created – another step toward a banking union within the EU. “Together with the growth measures decided at  the summit, this should buy us several months,” says Guy Verhofstadt, former Belgian prime minister and now leader of the Liberals in the European parliament. “Months we need to use to really tackle the crisis by establishing a fiscal union and by mutualizing debt.”

It is this mutualizing of debt that Merkel – and a few allies like the Netherlands, Austria, and Finland – particularly oppose. As soon as the whole eurozone is liable for the debts of individual nations, they argue, there is no incentive for governments to follow a prudent fiscal and budgetary course – it’s the return of checkbook politics.

So the fight is likely to go on.

“Certainly some form of debt mutualization will come,” says Jan Techau, director of Carnegie Europe, a Brussels-based think tank. “But it needs to be linked to structural reforms in the economies of southern Europe – that is not just Mrs. Merkel’s position.”

The conflict between the two camps, the austerity champions and the Keynesian spenders, will continue, according to Mr. Techau, until in the end a great political bargain will be struck, leading to a more integrated Europe.