Merkel Isolated in Race for Euro Crisis Solution

Time, however, is not one of the luxuries that the euro zone enjoys -- at least according to her host for Friday's preparatory "mini-summit"    ahead of the European Union meeting on June 29. In an interview appearing in several leading European papers on Friday morning, Italian Prime Minister Mario Monti warned of the consequences should the EU summit at the end of this month fail to reach far-reaching resolutions to calm the financial markets.

"There would be progressively greater speculative attacks on individual countries, with harassment of the weaker countries," he said. "A large part of Europe would find itself having to continue to put up with very high interest rates that would then impact on the states and also indirectly on firms. This is the direct opposite of what is needed for economic growth."

Monti's sentiments are shared by Spanish Prime Minister Mariano Rajoy and French President François Hollande, both of whom will also take part in the Friday meeting in Rome. The trio is demanding a departure from Merkel's slow and steady austerity course in favor of collectivized euro-zone debt and a greater emphasis on turning around Europe's flailing economy.

It is not difficult to divine the source of their concerns. Interest rates on sovereign bonds -- the canary in the coalmine of the euro crisis -- have once again been climbing in recent weeks. Both Italy and, to a greater extent, Spain have been watching as their borrowing costs soar close to unsustainable levels. Despite Monti's repeated insistence that Italy will not need a bailout, fears are increasing that he might be wrong.

Precursor to Wider Bailout?

And there is worry that Madrid might need more help than it has already been promised. Independent auditors on Thursday announced that Spanish banks are in need of €62 billion ($78 billion) in extra capital, money that will likely come from the €100 billion Europe has agreed to supply Spain out of the euro bailout fund. Madrid has indicated that it will make a formal request for that aid money in the coming days.

Many, though, fear that the bank package is but a precursor to a wider bailout. On Thursday, Spain had to pay record euro-era interest rates of 6.07 percent on five-year bonds. Should borrowing not become cheaper soon, the country's finances could be in serious trouble. Rates on benchmark 10-year bonds have for weeks been hovering close to the 7 percent mark, the level at which both Ireland and Portugal were forced to request a euro-zone bailout.

Given the increasing warning signs, even the International Monetary Fund is getting nervous. IMF head Christine Lagarde said earlier this month that Europe had but three months to save the euro. On Thursday, she added that "we are clearly seeing additional tension and acute stress applying to both banks and sovereigns in the euro area. With that in mind, the IMF believes that a determined and forceful move towards complete European monetary union should be reaffirmed."

Her comments come on the heels of similar statements from financial leaders around the world, including World Bank head Robert Zoellick and US Federal Reserve head Ben Bernanke.

The tortoise-and-the-hare battle between Berlin and the rest of Europe and the world has been on full display this week. At the close of the G-20 summit in Mexico on Tuesday, Monti demanded that the euro bailout fund be allowed to buy up sovereign bonds from countries in crisis -- free of conditions -- in order to drive down their borrowing costs.

On Thursday, he got his answer from Berlin. "We don't need constant new proposals in public as though we hadn't already reached precise agreements," said German Finance Minister Wolfgang Schäuble. He noted that the European Stability Mechanism, which is soon to go into effect, will be able to buy bonds on secondary markets, though there are conditions attached to the program. "We can't constantly raise completely unrealistic expectations" in an effort to calm the markets, Schäuble said.

The Terminator and Hitler

Schäuble's impatience with Monti notwithstanding, there are several projects in the works, ranging from a European banking union, which could ultimately provide a euro zone-wide deposit guarantee, to the creation of a tighter political and economic union to underpin the common currency. Both of those proposals have received Merkel's support in recent weeks -- but both are also solutions of the long-term variety that the Chancellery prefers.

Other ideas would seem to have little chance against Madame Non, including proposals to collectivize debt via the issuance of some form of euro bond or Monti's idea of allowing the ESM to unconditionally snap up sovereign bonds.

Still, it seems unlikely that Merkel will be able to stonewall completely. With Sarkozy gone from the euro-zone stage, the German chancellor now stands largely alone in her battle for austerity. She faces significant pressure from a newly elected Hollande, a political leader in Monti whose approval ratings are plummeting at home and needs to show some form of success on the European state, and a leader in Rajoy whose management of his country's banking crisis has been widely criticized.

Furthermore, Merkel's crisis management has been blasted by leaders around the world, including US President Barack Obama and the leaders of Brazil, India, Argentina and Russia. The media too has gotten on her case, the most recent -- if breathtakingly tasteless -- salvo coming from the British magazine New Statesman, which compared Merkel to both the Terminator and Hitler in the span of a few short paragraphs and also said she represented a greater threat to the world than Iranian President Mahmoud Ahmadinejad.

The next few days, in short, promise to be tense. Merkel, though, has managed to find time in her schedule for a bit of relaxation. As soon as the meeting in Rome ends on Friday, she is off to Gdansk. Germany, after all, is playing Greece in the European Football Championship. Euro crisis be damned.