Merkel holds the line on austerity

GlobalPost, May 7, 2012

BERLIN, Germany — At times during the French election campaign, one would have been forgiven for thinking that Francois Hollande’s opponent was named Angela Merkel, not Nicolas Sarkozy.

Such was the importance of Germany, and of the Berlin-dictated policy of austerity, in the debate.

“Germany does not speak for Europe,” were his fighting words during the campaign to unseat one half of the duo known as Merkozy.

And you could say he was provoked. After all, Merkel had very publicly supported his opponent.

Sarkozy had become her dependable sidekick on EU matters, much to the infuriation of many of the two big countries’ EU partners. The German leader regarded the French conservative as the best guarantee that Berlin’s policy of reform and austerity would be pursued in dealing with the euro crisis.

But the French electorate had other ideas.

They voted for Hollande, one of whose central campaign pledges was a refusal to sign up to the Merkel-designed fiscal compact, unless there are elements of growth included.

In his campaign, he seemed to emerge as the champion for an alternative to the Merkel doctrine, which narrowly focused on belt-tightening and structural reform.

His victory puts Merkel in an awkward spot. Not only is she now going to have to deal with a French leader she very obviously snubbed — she refused to meet him during the campaign.

She is also going to be faced with a leader in Paris who has very different ideas about the best way to tackle the euro crisis.

On Monday, Merkel sought to alleviate any concerns about how she would get on with the French president-elect, who is due to make a trip to Berlin almost immediately after his inauguration early next week.

She told a news conference that she would welcome Hollande “with open arms,” insisting: “We will work together well and intensively.”

After all, the French-German relationship has long been the traditional motor of the European project, one that has often transcended party politics, as exemplified by the socialist Francois Mitterrand and conservative Helmut Kohl.

Nevertheless, the Berlin line is also very clear that it will not be waiving on a key Hollande demand: a renegotiation of the fiscal compact.

Volker Kauder, the parliamentary floor leader for Merkel’s conservative Christian Democratic Union (CDU) insisted on Monday that there was no room for a renegotiation, as the pact had already been ratified by some EU states and Ireland was about to hold a referendum on it.

“We cannot work in a Europe where, once elections are held, agreements made beforehand are no longer valid.”

Yet Hollande had already seemed to scale back his talk of a rejection of the fiscal compact, signalling that a growth pact to complement the existing deal would also be acceptable.

At the same time, exactly what a growth pact might entail could look very different depending on which side of the Rhine you are on.

There may be some scope for agreement over increasing the use of the European Investment Bank (EIB) and structural aid funds, or even so-called “project bonds” to help fund infrastructure projects.

However, Berlin will not accept euro bonds or any interference in the mandate of the European Central Bank (ECB).

On that, Merkel is at one with both ECB President Mario Draghi and Jens Weidemann, the head of the Bundesbank, who previously served as her advisor.

Berlin will also aim to steer any discussion of a growth pact away from hopes for some kind of expensive stimulus program.

“We don’t want growth through new debt, rather we want growth through structural reforms,” Merkel’s spokesman Steffen Seibert told reporters on Monday in Berlin.

“The question is what kind of growth you mean,” Seibert said at the news conference. “We have to create the conditions for companies to be productive and innovative so they can give people jobs. We have to get rid of the restraints holding them back. We have to scale back bureaucracy.”

Merkel is determined to hold firm on her insistence that Germany, already Europe’s paymaster, not be left on the hook for any further debt, whether it be through euro bonds or some kind of stimulus program. That is something that German voters would not forgive.

On the whole, the German electorate is supportive of Merkel’s firm handling of the euro crisis. Yet, her party suffered a setback on Sunday, with the defeat of a conservative coalition in the northern state of Schleswig Holstein. That was largely due to the poor performance of the Free Democractic Party, also Merkel’s junior partners at the federal level, who are caught in a leadership crisis and struggling for survival.

Merkel’s own CDU was actually the strongest party, attracting just over 30 percent, but the opposition parties are likely to form a coalition there. With a federal election coming next year she will know that her euro policies and the strong economy are her two trump cards with the electorate.

The danger is that the euro crisis could begin to start to impact German voters.

If the economy in Germany starts to suffer from the recession gripping the rest of the euro zone, then Merkel’s party could start to face a drop in support.

Meanwhile, Merkel will face pressure to form a working relationship with Hollande as soon as possible. After all, there is great uncertainty following the Greek electorate’s decision to back anti-austerity parties, which could plunge the euro zone into renewed turmoil.

Many commentators in Germany on Monday were predicting that Hollande in office may be more willing to compromise than he was as a candidate, and that the two leaders could actually end up getting on rather well, since they have a similar temperament and share a consensus-building approach to politics.

However, detente may have to wait. The French parliamentary elections are in June, and Hollande will be hoping that his Socialist Party become the dominant force in the National Assembly. That means campaigning against Merkel could continue just a little while longer.

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