Waiting game: Angela Merkel prepares to receive Russia's Vladimir Putin in Berlin this month.
These are troubled times for Europe’s most powerful politician. As the eurozone crisis comes back to the boil, Angela Merkel, German chancellor, seems to be losing friends and influence at home and abroad.
At the Group of Eight summit hosted by President Barack Obama at Camp David last month, and again
at the European Union’s informal summit in Brussels two weeks ago, the woman who has dominated the debate about the future of the euro cut a distinctly lonely figure. “Merkel isolated,” the headlines read. The pictures suggested much the same. As they prepared for the G8 family photograph, Mr Obama paid far more attention to François Hollande, the new French president to his right, than to Ms Merkel, his former ally in tackling the global financial crisis, to his left.
While the chemistry between them never really worked, the chancellor is missing Nicolas Sarkozy, the former French president. In the heat of the eurozone crisis, their double act was nicknamed “Merkozy”, though it was in reality dominated by the German chancellor.
As time to stop contagion raging through Europe’s financial markets runs out, she must now find a modus vivendi with Mr Hollande. Both are pragmatists, but he is a Socialist and she a centre-right Christian Democrat. He wants to boost economic growth, and she insists cutting borrowing comes first. The feeling in Berlin is that the pair will work well together – but may take time to settle down.
At home, the chancellor is struggling to breathe new life into her fractious coalition government, after last month suffering a bruising political defeat in the largest federal state, North Rhine-Westphalia. She sacked the man seen to be responsible – Norbert Röttgen, her close ally and environment minister, who was party leader in NRW. But her Christian Democratic Union has dropped several points in the polls.
Just at the moment when she needs all the support she can find to stabilise the euro and rescue her debt-strapped partners in southern Europe, Ms Merkel’s reputation as a clear-sighted, unflappable leader is being called into question.
Cautious and risk averse, she seems to be constantly protecting her back against the threat of a eurosceptic backlash at home that has not yet materialised. This leaves her partners terrified that although her instincts are right – to do “whatever it takes” to save the euro – she may repeatedly act too late to prevent contagion spreading across the eurozone, leaving decisions until the 11th hour.
“The myth of Merkel’s sacrosanct crisis management seems to be finally ending,” says Professor Henrik Enderlein of the Hertie School of Government in Berlin, an adviser to the opposition Social Democratic party (SPD). He sees her facing a fundamental choice. Either she succeeds in negotiating a “big leap towards European integration” to save the euro; or she sticks to her “step-by-step” approach, negotiating tough new rules of fiscal discipline before offering any financial guarantees to her partners.
The former strategy requires persuading reluctant voters and leaders – including Mr Hollande – to forge a fully fledged “fiscal union” in the eurozone. The latter, says Prof Enderlein, “runs a serious risk of demolishing the euro”.
Ms Merkel has been written off before. One of the political lessons she learnt from Helmut Kohl, the former chancellor and her political mentor, was the advantage of being “constantly underestimated”. She also learnt to be eternally patient and “sit out” any political debate until all participants had agreed on a compromise.
In the eurozone crisis, however, she admits there is a clash between the short-term perspective of the financial markets and the slow pace of political decision-making.
As the rest of Europe waits with trepidation for the result of the Greek election on June 17, to see if voters dump the rescue plan negotiated by the last government, Spain has been hit by the contagion of uncertainty, with the interest rate spreads on its debt rising to new records. George Soros, the hedge fund investor, believes there are just three months to save the euro. Joschka Fischer, the former German foreign minister and a passionate pro-European, believes “we are now very close to break-up”.
Yet there has been a virtual radio silence from the chancellery and the upper echelons of the German government in recent weeks. “I do not think it is a good idea to indulge in speculation when there is a difficult situation in the financial markets and in Greece itself,” said Wolfgang Schäuble, Ms Merkel’s powerful finance minister, in a newspaper interview this week. “Greece must decide for itself.” As for Madrid, he added: “The Spaniards are doing the right things.”
Sceptics stir the political scene
At the next general election, Germans may be offered the chance for the first time in decades, to vote for a conservative eurosceptic party, complicating an already complex political process.
The Freie Wahler – Free Voters – have announced plans to run next year for both the federal parliament in Berlin and the state parliament in Bavaria. If they pick up support, it could well push Angela Merkel into a more nationalist position on European policy.
The FW party, which won more than 10 per cent of the vote and 20 seats in the Bavarian state assembly in 2008, has wooed Hans-Olaf Henkel, a leading critic of the euro and former head of the German manufacturers’ association, to join its parliamentary list. He favours splitting the currency into two, with a northern “hard currency” centred on Germany and a weaker southern unit centred on France.
Although the organisation’s base is in Bavaria, where the Christian Social Union – sister party of Ms Merkel’s Christian Democratic Union – is the leading conservative party, it has also won seats in town and city councils across the country.
“They have a good chance to get back into the Bavarian state parliament,” says Joachim Koschnicke of Forsa, a polling agency. On a federal level, however, “it will be much more difficult to establish themselves.”
The other unpredictable element in the poll will be the Pirate party, campaigning against censorship of the internet, which has picked up a large minority vote in recent state elections, polling 8.9 per cent in Berlin last year and 7.8 per cent in North Rhine-Westphalia last month.
The Pirates have attracted protest voters from across the spectrum, according to pollsters, with strong support from younger Germans who have never voted before. In so doing, they have made it harder for the established parties to form stable coalitions. The Pirates say they do not want to join any government, and no established party seems inclined to trust them as a potential partner.
The latest Forsa poll in Stern magazine puts the CDU on 33 per cent, the Social Democrats (SPD) on 27 per cent, the environmentalist Greens on 14 per cent, the Pirates on 11 per cent, and the liberal Free Democrats on just 4 per cent, meaning that no two parties would have an outright majority, except for a grand coalition of CDU and SPD.
So, while investors urgently seek assurance that Germany and its partners have a game plan to manage the crisis, both Mr Schäuble and Ms Merkel – the most powerful personalities in the government and the CDU – feel far more comfortable talking about medium-term solutions.
“Their strategy for a very long time has been to focus on structural reforms and the medium term, and rely on the European Central Bank to fix things in the short term,” says Clemens Fuest of the Oxford university centre for business taxation, an adviser to the German finance ministry. He says this is a deliberate but mistaken attempt to avoid debate on questions that are politically difficult in Germany, such as the introduction of jointly guaranteed eurozone bonds. It seems doomed to failure.
“Merkel is now in a very weak and very difficult position,” he says. “People see her as the strong woman of Europe. Up till now, the strategy was to get as many controls in place as possible [before committing any more money]. But the Germans will still have to agree to pay whatever is necessary to avoid a break-up.”
The German-inspired fiscal pact, requiring strict budget discipline to be inserted into the national constitutions of all eurozone members – or the legal equivalent – forms part of that strategy. Negotiated at extraordinary speed in December and January, it now awaits ratification by 25 of the 27 EU member states. To German eyes, it was essential to put budget discipline into primary legislation in every country: it was the first step towards a “fiscal union”.
In the six months since the pact was agreed, Ms Merkel has developed a follow-on twin-track strategy. It combines structural reforms to boost growth – without a debt-financed stimulus – and more fundamental institutional reforms laying the basis for that fiscal union to complement the eurozone’s monetary union.
Both elements will be presented to EU leaders at their summit at the end of June. Last month’s dinner in Brussels issued instructions for Herman Van Rompuy, European Council president; José Manuel Barroso, European Commission president; Mario Draghi, ECB president; and Jean-Claude Juncker, chairman of the Eurogroup of eurozone finance ministers, to come up with proposals.
Most urgently, in light of the Spanish banking crisis, they are likely to include plans for a “banking union” combining European regulation of cross-border institutions with a European fund to provide deposit guarantees. But Ms Merkel insists that is a medium-term measure.
Mr Schäuble says the same timeframe applies to the introduction of jointly guaranteed eurozone bonds. They cannot be introduced without a real “fiscal union”, he says, although he does not rule them out altogether.
In Germany, such bonds – favoured by a clear majority of eurozone leaders – have become a touchstone of the debate on the euro. Opinion polls suggest 80 per cent of voters oppose the idea. “Clearly, Ms Merkel has won the German domestic debate on eurobonds,” says Prof Enderlein. “She painted them as the devil’s work. But nobody really understands them.
“We know the euro debate is extremely complex. It is the chancellor’s role to shape German public opinion. She has always run a policy signalling at first that she might turn nationalist – ‘There will be no money for Greece,’ she said – and then at the last second turning pro-European. This might be a workable crisis strategy, but you lose public opinion.”
. . .
Yet the underlying political reality, both in Germany and the rest of Europe, is that the chancellor is more in tune with public opinion than are many of her critics. The latest opinion poll published by the Pew Global Attitudes survey last month showed that she is the most respected European leader in every country except Greece. The same is true at home. According to Pew, 80 per cent of Germans think Ms Merkel has done a good job as an economic manager.
The German electorate also remains more fundamentally pro-European than those of any of the other big EU members – with 59 per cent saying the country has been “well served by European integration”, according to the survey, and 65 per cent saying EU membership is a good thing for the nation, in spite of the euro crisis.
Although her CDU party has slipped in the polls by a couple of points since its defeat in the NRW state elections, Ms Merkel herself has emerged virtually unscathed, according to Joachim Koschnicke of the Forsa polling institute. “NRW has been written off by voters,” he says. “Sacking Mr Röttgen has actually strengthened her.”
His polling suggests voters do not trust the SPD to deal with the crisis as well as the CDU. If there were a general election tomorrow (it is not due until the latter half of 2013), Ms Merkel’s party would top the poll with 33 per cent support, followed by the SPD with 27 per cent. They would probably need to form a grand coalition of centre-left and centre-right to obtain a parliamentary majority.
Professor Andreas Busch of Göttingen university believes this may be what Ms Merkel is aiming for. “She would probably give her right arm to go back into a grand coalition,” he says. The three-party centre-right government is racked by disputes over domestic tax and social issues. “Given the unhappy way the present coalition runs, it couldn’t fail.”
A combination of CDU and SPD would amount to a very pro-European government, one far more likely to countenance eurozone bonds, for example, than the present coalition – which might well suit Ms Merkel. But the crisis seems unlikely to wait for the German political cycle. She may have to make up her mind much sooner.
“I am sure she will end up doing the right thing to save the euro,” a senior European politician said last week. “But she may not do it until she is on the edge of the abyss. That may be too late for the rest of us.”
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