There has been an outward show of unity. To wit, the EU governments put together a bailout package for Greece, a €750 billion rescue fund for the euro, new hedge fund rules, and even came close to seeing eye to eye on the touchy issue of a tax on financial transactions. But appearances are deceiving. Behind the scenes, centrifugal forces are pulling the Union apart. Instead of rallying together at this critical juncture in history, member states are immersed in a ferocious power struggle in which they are bypassing EU institutions, playing lone hands and snubbing their partners. A new gulf has opened up between the two principal players, Germany and France.

The first overt sign of this falling-out was the German government’s unilateral bolt from the blue to ban so-called “naked short selling”. An international conference on financial market regulation was held on 20 May in Berlin – without any EU involvement. “Germany is turning its back on the European Union,” groans a high-level government representative in the European Council. “These measures would be a lot more effective if they were dovetailed at European level,” admonishes EU internal market commissioner Michel Barnier. But the EU institutions have fallen victim to a clash of interests between Berlin and Paris.

What actually went down behind the scenes of the hastily convened special summit on 7 May did not emerge till after the fact. The meeting was delayed by two hours owing to a preliminary tête-à-tête between German chancellor Angela Merkel and French president Nicolas Sarkozy. Whilst the other assembled heads of state were waiting around, Merkel and Sarkozy were thrashing out their differences behind closed doors. Their one-on-one promptly degenerated into a screaming match. According to delegation members, they argued not only about the rescue package for the euro, but about the European Central Bank’s monetary policy, economic coordination and the euro Stability Pact. The duo looked sullen and morose as they left the room. And they went on quarrelling even in the circle of the other 25 heads of state. Sarkozy pounded his fist on the table, even threatening to leave the euro club, Spanish president José Luis Zapatero later recounted.

“She cost us billions”

With backing from Italy, Spain and Portugal, the French president had built up a front against Merkel, who was roundly rebuked above all for dithering on the Greek crisis. “By doing that, she cost us billions,” moans one government representative. Flying in the face of German interests, Sarkozy succeeded in breaching the Central Bank’s hitherto impregnable wall of independence.

The rift “runs along ideological lines and diverging national interests”, say observers. On the one hand there is Paris along with its Mediterranean partners striving, amid the crisis, towards the long-cherished goals of exerting greater political influence on the ECB and easing up its interest rate and monetary stability policies. And they seek tighter European economic coordination with a view to chipping away at German competitiveness.

EU crisis of confidence

On the other hand there is Germany, which rejects out of hand any such coordination, however logical it may be. Instead, it is banking solely on harsher sanctions to buttress the straight-and-narrow course of euro stability. Angela Merkel’s warning is symptomatic: “The euro is in danger,” she blustered in a government statement on Wednesday, calling for a “culture” of greater fiscal restraint on the part of all the EU states. French economy minister Christine Lagarde retorted, “I absolutely do not think the euro is in danger.”

“The EU is going through an internal and external crisis of confidence,” sums up political scientist Paul Luif. Inside the Union, unilateral action has enfeebled the EU institutions, thwarting EU Commission attempts to exercise its control function. And outwardly, the EU has no image of stability to offer the international community. The waning euro makes that all too plain. Instead of trying to tackle internal structural problems and differences, so Luif, “they’re looking for other culprits to blame, like hedge funds and speculators”.