Merkel Walking an Electoral Tightrope

The Sunday Business Post, April 10, 2011

The reaction in the political corridors of Berlin to the fact that Portugal has finally faced the music and asked for a bailout has been one of relief.

This is tinged with determination that this will be the last country to require a lifeline from its eurozone partners.

The German government, battered by a string of losses in key regional votes since the beginning of the year, is loath to be seen by the electorate as wasting yet more of taxpayers’ money on their profligate neighbours.

With just two years to go to federal elections, the ruling coalition of Chancellor Angela Merkel’s conservative Christian Democrats (CDU) and the pro-business Free Democrats (FDP) is fully aware that any further bailouts – of, say, Spain, Italy or Belgium- could spell electoral doom.

The hope is that, by coming to Portugal’s aid, the EU, ECB and IMF will manage to prevent contagion spreading to Spain and beyond.

German finance minister Wolfgang Schäuble welcomed the news that Lisbon would be seeking to avail of the European Financial Stability Facility (EFSF) fund, saying it was a ‘‘sensible and necessary step’’.

He pointed out that, within the current bailout mechanism, aid would be available only in return for ‘‘an adjustment programme’’ – in other words, further austerity measures.

Merkel’s junior coalition partners, the FDP, have been even less enthusiastic about the bailouts, with an increasingly eurosceptic attitude emerging in the party.

Yet the noises from the liberal camp have so far been positive about the prospect of a Portugal deal.

Senior party figure Volker Wissing welcomed Lisbon’s decision to avail of the EFSF mechanism. ‘‘We’re relieved that Portugal is now seeking aid and thus sending a signal that will calm markets,” he said.

Werner Hoyer, junior foreign minister, said the decision had averted a ‘‘very serious threat’’ to Portugal and the eurozone, adding that the markets showed there was no chance of a ‘‘chain reaction’’.

Some German economists, however, are already warning that Portugal may not be the final domino to fall. Beatrice Weder di Mauro, a professor of international economics and one of a group of economists who advise the German government, said politicians in Europe had to come up with a credible plan for dealing with the struggling eurozone states, or ‘‘there could also be contagion to relatively solid countries’’.

Meanwhile, Hans-Werner Sinn, president of the Ifo Economic Research Institute, cautioned that Germany could not bear the cost of bailing out bigger eurozone countries, such as Spain and Italy.

‘‘We are overextending ourselves,” he told Bild. ‘‘The more money flows, the longer these indebted countries will live beyond their means.”

He argued that newer and bigger rescue funds would not be without long-term consequences for German consumers and taxpayers. ‘‘The politicians are putting our pensions at risk,” he said.

Germany, as the largest eurozone country, is the biggest contributor to the bailout. It is likely to have to guarantee €12-14 billion of the predicted €90 billion that Lisbon will request from the EFSF. While this latest rescue deal had been widely anticipated, German voters may seek to punish Merkel and her coalition further if yet more eurozone states require assistance.

The temporary EFSF, created in the aftermath of the Greek bailout, winds down in 2013 and will be replaced by a permanent mechanism. Merkel has already insisted that the fund be built up in instalments.

2013 is, after all, also a federal election year and she will need to assuage the fears of voters if she is to have any hope of securing a third term.

The prospect of victory is coming under threat, despite a booming economy, relatively strong growth and the lowest unemployment levels since just after reunification.

Germans tend to regard these achievements as being a result of their own sacrifices and hard work over the years, rather than clever policy on the part of politicians.

In fact, the current CDU-FDP government has been fraught with problems and bickering from the outset, and has suffered a massive drop in support since being elected in 2009.

The FDP, in particular, has disappointed in office. The party ran on a narrow platform of tax cuts in 2009, securing its best-ever national result of 15 per cent. Its efforts to follow through on these have been thwarted by CDU finance minister Schäuble and it has been left with few other policies of its own.

The FDP’s poor performance in the regional elections has already forced the unpopular foreign minister Guido Westerwelle to step down as party leader and deputy chancellor.

The Christian Democrats did not fare quite as badly but the loss of Baden-Wurttemberg, a conservative bastion since the 1950s, was a huge blow for the party.

Nevertheless, without a credible challenger, Merkel’s position as party leader remains secure – for now.

Originally published in The Sunday Business Post (10 April, 2011)

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