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Thomas Molloy: Angela will be in a huff -- but we can breathe a bit easier

GERMANY'S Chancellor Angela Merkel blinked early yesterday morning and it looks like she may make a habit of it.

The agreement that came out of the 14 hours of negotiations over the last two days was a political victory for the embattled Italian Prime Minister Mario Monti and his Spanish counterpart Mariano Rajoy and a defeat for Ms Merkel, who had dismissed any need for such measures just days earlier.

Germany's decision to allow easier access to the rescue funds and direct help for banks flew in the face of everything that Ms Merkel said she wanted as recently as a fortnight ago.

She did not agree to euro bonds, and probably never will, but everything else is on the table.

'Bild' -- the influential mass-circulation newspaper that reflects and shapes German public opinion -- spoke of a turning point in German policy yesterday and told its readers that the chancellor appears to have caved in to the Italians, Spaniards and French.

Ms Merkel, who pays close attention to what Europe's best-selling newspaper reports, won't like the brutal summary of her change of heart, but she may draw comfort from the newspaper's broadly positive welcome to her U-turn and its reminder to readers that the crisis was close to bringing down Spain and Italy.

The markets have also reacted well despite the lack of detail and the reason is clear: the leaders of the eurozone no longer give the impression that they are unable to agree on a way forward.

It is still not clear when Ms Merkel decided to change tack. She held a bilateral meeting in Paris on Wednesday evening to coordinate policy and a dinner with the eurozone's three other big leaders earlier this week. In both meetings she had looked increasingly isolated, although her diplomatic position has been increasingly untenable for months.

Many commentators (including this one) failed to grasp the significance of Francois Hollande's election in May and the jolt it gave to the Franco-German relationship.

The departure of Nicholas Sarkozy, together with the election of Spain's Rajoy in March and the appointment of Monti to replace Silvio Berlusconi's buffoonery last November, means Ms Merkel must contend with serious leaders in the three eurozone countries which have any chance of really influencing Germany.

The three musketeers from Europe's leading Latin countries have joined forces and changed the balance of power for now.

They have also been abetted by Mario Draghi, the intriguing president of the European Central Bank, who has brought a new flexibility to the eurozone's central bank. Mr Draghi, who replaced the old-style Jean Claude Trichet as ECB boss, has made life a little harder for the Germans and a little easier for her opponents. Another factor that is undoubtedly playing in Ms Merkel's mind is her rendezvous with the German electorate late next year.

The political atmosphere in Berlin is febrile at the moment. The chancellor's junior FDP coalition partners are wounded and languishing in the polls.

An implosion in FDP could bring down Ms Merkel and force an election, which she might very well lose. Curing problems through austerity is a slow process and Ms Merkel may well feel that she needs to start priming the pumps to make her own re-election a little easier.

A final consideration for both Ms Merkel and her electorate is the increasingly fragile German economy.

As most of the eurozone crashed and burned, Germany boomed as it exported machinery to the developing economies, which are still growing rapidly despite problems in the West and Japan.

For years, it had seemed that Germany was immune to the crisis.

Lately, unemployment has risen slightly, confidence has dipped and exports have faltered.

Isolated, vulnerable and worried, Germany performed a volte face yesterday morning but Angela Merkel has not given up.

She is still Europe's pre-eminent political leader and remains a cautious and tenacious negotiator.

The significance of the 20th European summit since the crisis began is that Germany is now adopting a "whatever it takes" approach.

The process won't be easy and there is plenty of room for misunderstandings but there are many reasons to hope.

Central Bank Governor Patrick Honohan, who sits on the board of the ECB, was in an upbeat mood in Dublin yesterday afternoon.

"If financial markets and growth conditions in Europe can indeed be stabilised, if financing conditions for Ireland can be improved, and if restraint remains the policy watchword at home, the corner can soon be turned," he told an audience in Dublin.

Prof Honohan is no slouch. The governor knows that others have spoken of turning corners many times before when they should have been warning of pitfalls but his cautious optimism appears justified; something amazing happened in Brussels this week and we can all breathe a little easier as our children head into the summer holidays.

Irish Independent