With Merkel in Charge, Europe Faces a Crisis on Many Fronts

(Bloomberg) -- For a leader who has steered Europe through two economic meltdowns, a migration crisis and a simmering showdown with Russia, Angela Merkel's final act as German chancellor may be her biggest performance yet.

Germany takes over the European Union's rotating six-month presidency Wednesday as the 27-member bloc's economy is forecast to contract 7.4%, the U.K. has left the bloc, and countries continue to struggle with the coronavirus. And that's on top of an expected trade escalation with the U.S. that could involve new tariffs on billions of dollars of EU exports.

“We're aware that Germany's presidency comes with great expectations,” Merkel said in a weekly podcast Saturday. Here is what's on her mind.

Coming back from the pandemic and the fear of a second wave

Merkel plays a key role in passing a radical EU-wide stimulus package, which would see the bloc issue as much as 750 billion euros ($841 billion) in joint debt to raise funds for countries most affected by the pandemic.

The recovery plan will dominate the first month of her presidency and will be made all the more complicated by the financial hole left by Britain's departure.

“I must tell you that the positions of the member states are still far apart” on the recovery fund and the bloc's budget, Merkel said in Berlin as lawmakers queried her on the EU presidency, noting that Germany's European partners also need to pursue their own measures to boost growth.

Agreement needs to be unanimous and will require high-level trade offs in order to bridge diverging positions, with nations split across north, south and east. The final compromise will need to address both the economic impact of the pandemic and the distortions it has caused in the EU's single market, while maintaining a vital flow of funds to the bloc's poorest regions.

How Europe is moving ever closer to joint borrowing.

“Our goal is to get things agreed in July,” Foreign Minister Heiko Maas said Wednesday in an interview with ZDF television. “We expect it to come together.”

“It's important that countries like Spain or Italy, which were especially hard hit, can quickly access the funds,” Maas added. “It won't help them if it takes weeks more and that's why we're under great time pressure to get an agreement on all the financial instruments as soon as possible.”

And at the back of every leader's mind is the nagging concern that there will be another onslaught of infections just as people were letting their guard down, re-opening borders and trying to resume something approaching normalcy.

What to do when the EU is stuck between China and the U.S.

Merkel's call for a more independent and sovereign EU is partly directed at China. The German leader has struggled to make progress on an investment-protection agreement, which she wanted to make the centerpiece of an EU-China summit that had been planned for September.

Germany is weighing China's rise as a superpower amid concern about the competitiveness of European industries. Merkel's government wants to tackle one of the sacred cows of EU policy: independent antitrust oversight of company behavior and dealmaking to allow governments to discuss merger control between companies.

There is then the U.S. election to try and anticipate the actions of an unpredictable president in full campaign mode. Donald Trump has an uneasy personal relationship with Merkel and does not see eye to eye with the EU on many issues from Iran to trade and virus management (the EU has said U.S. tourists are not welcome). Will Merkel prep for confrontation or hold back, waiting to see who wins in November?

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But supply chains have been disrupted and trade can't wait

The EU's trade agenda is full of risks and pitfalls as the bloc grapples with the pandemic. This year, European policy makers will simultaneously wrestle with make-or-break Brexit negotiations that could roil European supply chains and the slow and steady implosion of the multilateral trading system. There is also a U.S. administration dead-set on hiking European tariffs in an election year.

Then there is a commitment to an ambitious green deal

The pandemic brought Europe to its knees, but the EU is channeling billions toward fighting climate change, and sees it as crucial to an economic recovery.

Everything you need to know about the EU's Green Deal.

The biggest challenge for Germany will be ensuring governments reach an initial agreement on a draft law to make irreversible the goal to achieve climate neutrality by 2050. The difficulty is to overcome national differences on issues ranging from energy sources to industrial strength and advance work on the costly clean transition at a time when money is scarce.

Saying goodbye to an old friend

While the EU presidency doesn't have a huge impact on Brexit negotiations, the fact the U.K. needs a deal during Germany's six-month term does give Merkel an added incentive to knock some heads together and the Brits have always looked to Merkel to make a difference. Talks have made little progress since March and that's not a state of affairs that Merkel will want to continue.

While she isn't going to accept a deal at any cost -- she won't want anything that undermines the EU's single market -- she'll do all she can to get a trade agreement with Britain before the end of the year. It's part of her legacy.

For Merkel, there is a wild card: Wirecard

Merkel will also have to grapple with a crisis close to home: The accounting scandal that brought down Wirecard AG, which has laid bare significant cracks in Germany's financial oversight.

The German leader has so far been mum after one of the biggest corporate failures in decades. Even with ample warning, German authorities failed to catch accounting issues at the digital-payments company. Slow decision-making, insufficient oversight and fragmented responsibilities created cracks that allowed the company's problems to go undetected by officials.

Brussels will call for a probe into Germany's banking regulator and that is when it stops becoming just a German problem, but a European one too.

©2020 Bloomberg L.P.