The German chancellor, vilified across the continent for saddling high-debt nations with austerity measures that have plunged them into deeper recession, succumbed to a rebellion by the leaders of Italy, Spain and France at last week's EU summit.
Angela Merkel's crown as queen of Europe in debt crisis slips
BERLIN // After two years as undisputed queen of Europe in the debt crisis, Angela Merkel's crown is slipping.
The German chancellor, vilified across the continent for saddling high-debt nations with austerity measures that have plunged them into deeper recession, succumbed to a rebellion by the leaders of Italy, Spain and France at last week's EU summit. They forced her to accept a softening of bailout terms she had vehemently rejected only hours earlier.
Mrs Merkel had built a reputation as skilful mediator on the international stage since coming to power in 2005, but she has lost it in the course of the crisis. Driven by domestic public opinion, she has adopted an uncompromising stance, forcing Europe into a fiscal straitjacket in order to limit the cost to German taxpayers of rescuing the euro.
Britain's left-wing New Statesman magazine described her as "Europe's Most Dangerous Leader" last month with a front page photo montage portraying her as a Terminator robot with a glinting red eye.
The magazine argued that Mrs Merkel's "mania for austerity" was destroying Europe and that she was a bigger threat to global prosperity and order than Iranian president Mahmoud Ahmadinejad or North Korea's Kim Jong-un.
The chancellor is thick-skinned enough to shrug off such hyperbole, just as she has ignored being featured in a Nazi uniform in the Greek media, as a whip-wielding dominatrix in Spain and being called a "lard-arse" in one Italian newspaper last week.
But the EU summit is widely seen as a stinging defeat for her. It showed Europe's balance of power is shifting from Berlin towards an alliance of southern nations.
The leaders of Italy and Spain, Mario Monti and Mariano Rajoy, with support from French President Francois Hollande, pushed Mrs Merkel into letting the EU's permanent rescue fund, the European Stability Mechanism (ESM), intervene on bond markets to shore up troubled states and to inject aid directly into stricken banks from next year.
They blackmailed her by threatening to block an EU growth pact that she urgently needed to secure broad support in a German parliamentary vote on her European policy on Friday. So she gave in, and in doing so crossed one of her red lines by allowing nations to get easier access to aid without forcing them to deliver anything in return.
"For the first time in more than two years of crisis, the euro states refused to obey a German command at a decisive moment," wrote Bild, the country's biggest-selling newspaper. "There is no doubt about it - the chancellor allowed herself to be taken off-guard at the euro summit."
Der Spiegel, a German news magazine, described Mrs Merkel as a "hostage of the south" and commented: "Europe's power architecture has shifted - to Germany's disadvantage."
Mrs Merkel, no stranger to U-turns at home, has stuck to her guns in Europe because most Germans are fed up with bailing out nations they see as profligate.
The German economy is still doing well, unlike most of its neighbours, but there are fears that the bailouts will end up overstretching even Germany's resources. Its exposure in loans and guarantees amounts to €310 billion (Dh1.423 trillion).
At the previous 19 summits held since the crisis erupted, Mrs Merkel got her way because she had an ally in French President Nicolas Sarkozy, who was voted out of office in May. His successor, Mr Hollande, has cancelled the close Franco-German alliance that had steered EU policy for decades. Mrs Merkel has looked increasingly isolated in recent months.
She faces trouble at home because her concessions have caused uproar among her conservatives. A key member of her coalition, Bavarian governor Horst Seehofer, threatened to bring down her government if she softens her position any further.
A further danger comes from Germany's Federal Constitutional Court, which has been inundated with petitions to block the ESM and the "fiscal pact" on European budget discipline that the German parliament approved last Friday. The measures, opponents argue, breach the constitution because they will transfer powers to Brussels.
The scale of Mrs Merkel's defeat in Brussels shouldn't be exaggerated, however. The rebellion hasn't dethroned her. She is still, after all, the leader of Europe's biggest economy -- and she is an astute negotiator.
She quietly pushed through a major German demand in Brussels - the establishment of a European banking watchdog run by the European Central Bank.
And the much-vaunted €120bn European "growth pact," initiated by Mr Hollande and celebrated in France as a big win over Mrs Merkel, contains virtually no new money - it will all come from existing EU structural funds.
In the end, she was beaten not by the Italians, French or Spanish but by the crisis itself. Without a deal to give Spain and Italy easier access to aid, their borrowing costs would have spiralled the next day. Her tough talk before the summit was aimed at placating her party. Once in Brussels, she had little choice but to budge.
With the debt debacle set to grind on, Mrs Merkel is likely to be forced into more concessions - a difficult prospect for her ahead of an election in 2013.