Deal emerges from series of remarkable events

WHEN NICOLAS Sarkozy arrived in Berlin on Wednesday evening, the French president would have been forgiven for thinking the crowd was waiting for him.

But the mass of people filling the plaza between the chancellery and the Reichstag were parents here to watch their children join the armed forces with an oath of allegiance to Germany.

That soldiers and marines lined up for the ceremony on this historic site was a postwar first and another small but significant indication of a shift taking place in German thinking about its place in Europe and the world.

That feeling of a country in flux has run through the 21-month euro zone crisis, headed by a German leader hesitating between old and new oaths of allegiance to a European ideal.

In the eighth floor of the Berlin chancellery, the lights burned until after midnight.

German chancellor Angela Merkel was holding court.

At 5.30pm, with just hours’ notice, Sarkozy arrived for a modest dinner of duck and potato puree. The face-to-face meeting was a last attempt to break a Franco-German deadlock after inconclusive phone talks the previous day.

Both leaders were aware of the need for a compromise and there was little to distract them in the chancellery dining room: amid the white walls, grey carpet and white sofas, only a colourful Picasso portrait breaks up the monotony.

As the evening wore on, Sarkozy – on Merkel’s home turf for the second time in a month – dropped his demand for a levy on bank assets to help finance a second Greek bailout.

But that was not the only shift in this remarkable late-night meeting. A surprise guest, European Central Bank president Jean-Claude Trichet, arrived from Frankfurt at about 10pm.

The German leader turned her attention to the new arrival, with whom she has clashed regularly in recent months.

Every time Merkel insisted on private-sector involvement in the Greek deficit – and that was almost every time she spoke on the euro – Trichet warned that such a move would open a financial Pandora’s box.

In the peace and quiet of the chancellery, Trichet moved and Merkel followed.

He said the ECB would drop its opposition to a selective Greek default as long as euro zone members agreed to hold a guarantee umbrella over the Frankfurt bank until normality returned to financial markets.

Presuming this disturbance would only last a few days, Merkel agreed to pump extra money into the European Financial Stability Facility – an agreement she has to sell to her sceptical backbenchers.

As their plan began to take shape, nearing midnight, Merkel and her two French visitors put it to European Council president Herman Van Rompuy in Brussels.

Merkel and her visitors talked to him by phone first, and then sent a written proposal to Brussels.

By 4am Van Rompuy’s officials had fleshed out the Franco-German proposal and circulated a paper containing issues of interest to the other 15 member states – in particular wider flexibility in the stability facility and lower interest rates.

This was the base for negotiations when the “sherpas” arrived early yesterday in Brussels.

As government jets began landing in Brussels airport, an agreement was firming up.

Ahead of the summit, Merkel brought her dinner-party guests together with European Commission president José Manuel Barroso and Greek prime minister George Papandreou for a final pep talk.

By the time other leaders began arriving in the near-deserted European quarter – for once due to a national holiday in Belgium rather than a security lockdown – a feeling of relief was spreading.

For the Irish delegation, it was a relief that the big European players see the crisis as a widespread, continental one requiring a holistic solution.

The summit grapevine reported that the Greek finance minister, Evangelos Venizelos, had been called in to talk to leaders. Later, word went round that the Institute of International Finance – the banks’ money men – was there too.

After lunch, the news began

to leak out that Ireland’s interest-rate saga was nearing an end. Waiting journalists dragged themselves away from Tour de France coverage on the television to congratulate their Irish colleagues on the good news.

There was palpable, widespread relief, too, that Berlin was close to settling to its satisfaction the issue of private-sector involvement, lifting a roadblock to a deal.

By mid-afternoon, as the sky darkened and rain hammered down on the press atrium’s glass ceiling, the mood dampened once more. Progress was slowing: parallel to the main talks, finance ministry officials were crunching numbers to satisfy a German demand that any deal contain concrete figures.

The German need to pin that down reflected the high-stakes strategy of the German leader: after months of outright rejection of common “euro bonds”, pooling euro zone debt-raising ability, German officials conceded Merkel was agreeing to just that, albeit on a limited scale, for Greece.

A sense of momentum and movement returned by late afternoon with the news that IMF managing director Christine Lagarde had entered the building.

For her, it was a flying start in her new role. For another, it was the end of an era: ECB president Trichet prepared to hand over the Frankfurt institution in circumstances neither he, nor anyone else, could have imagined.

What has been proposed?

The time period on euro zone rescue loans to all three assisted countries would be extended to 15 years from 7.5 and the interest rate cut to about 3.5 per cent from between 4.5 and 5.8 per cent now.