x Abu Dhabi, UAEWednesday 24 January 2018

Angie’s Europe

With the upcoming German election , Paul Hockenos assesses Angela Merkel’s chances at the ballot box and what a third term for the enigmatic chancellor could mean for the European Union and the troubled euro.

Angela Merkel, the German chancellor and chairwoman of the German Democrat Union (CDU), gives a speech in Dusseldorf during the last phase of campaigning before federal elections on September 22. Merkel and the CDU have a strong lead in polls, though she has her detractors, especially outside of Germany. Sascha Schuermann / Getty Images
Angela Merkel, the German chancellor and chairwoman of the German Democrat Union (CDU), gives a speech in Dusseldorf during the last phase of campaigning before federal elections on September 22. Merkel and the CDU have a strong lead in polls, though she has her detractors, especially outside of Germany. Sascha Schuermann / Getty Images

Along Berlin’s wide Prussian boulevards, huge billboards project the larger-than-life, smiling face of Germany’s chancellor, Angela Merkel. In the final week of the election campaign, posters and placards of a dozen parties are plastered across the city’s facades, from its posh, leafy suburbs to the maze of cobbled backstreets that surround its signature Alexanderplatz.

Almost all of the billboards put up by Merkel’s conservative party, the Christian Democratic Union (CDU), feature the chancellor herself, Germany’s most popular politician – and the sure ticket, believe German conservatives, to their reelection tomorrow.

German critics have complained bitterly that this has been an election campaign largely devoid of hard-nosed exchanges on concrete issues – a state of affairs particularly inappropriate, they admonish, given the plethora of critical issues, including the euro crisis, the war in Syria, quickening climate change and a dramatic transatlantic spying affair. “Routine boredom, the prescribed running through of party programmes. No passion, no nothing,” griped Spiegel Online, reflecting much of the media’s take on the campaign to date.

In her stump speeches, Merkel barely mentions the euro crisis by name, despite the fact that [in surveys] Germans say it is their number one concern. But the subtext of the curt messages under the chancellor’s ubiquitous image – “Strong Economy”, “Steady Jobs”, “Solid Finances”, “Stability and Prosperity” –  speaks volumes about the German electorate’s priorities and how deeply the CDU understands them.

The conservatives’ political fortunes are inextricably bound up with Merkel’s handling of the euro crisis. On a much bigger scale, so too is the future of the common currency and the European Union. Yet, unlike most Germans, critics outside the country believe Merkel is failing to lead at a time when Europe most needs resolute leadership. And her Germany-first, austerity-driven policies, say many, could actually impede a Europe-wide recovery and irrevocably damage the European Union.

In Germany, though, Merkel’s personal popularity is at an all-time high. The headshots and vague messages of her campaign material underscore this, as well as the way she has deftly balanced the euro crisis, on the one hand, and Germany’s own economic performance, on the other. The message is that Merkel can deliver a robust German economy in times of crisis; pull the hard-hit southern Europeans out of trouble with the least-possible German financing and maximal leverage for reform; and, not least, keep the EU from fracturing at the gravest moment of its existence.

If she can convince Germans of this, and it seems that she has, she will walk away with the election and secure a third term in office.

“It is indeed her best intention to do all of this, but it will remain to be seen whether she really can in practice,“ explains Joachim Fritz-Vannahme, the director of the Europe unit at the Bertelsmann Stiftung, an independent German foundation. Fritz-Vannahme maintains that “raising expectations that are higher than the real possibilities to make them succeed is a very risky strategy. The political status quo isn’t as stable as it looks in Germany,” he warns, pointing to new parties – on both the left and the right – that have recently made inroads in Germany.

Opinion polls show Germans are deeply worried about the euro crisis, but firmly committed to the EU. Over 90 per cent of Germans think the crisis is far from over – which is an astute reading of the situation, though not one Merkel and her party publicise. Despite this, over three-quarters believe the euro will weather the storm. Surveys underscore that Germans’ greatest concern is the crisis’s impact on their wallets, pension funds and Germany’s staggering debt.

Polls show that Germans’ faith in Merkel’s handling of the euro crisis is substantial – more than twice that of her campaign rival, the Social Democrats’ Peer Steinbrück.

“Germans believe she is managing the crisis well,” says Josef Janning of the German Council on Foreign Relations, a Berlin-based think tank. “So they think why change horses in the middle of a race? We know what her track record is, they say, but with Steinbrück we don’t know what we’re getting.”

Two-thirds of Germans are against extending more aid to Greece, a possibility that Ms. Merkel once ruled out and had hoped to postpone even discussing until after the election. Now it looks inevitable, as does more debt relief, commonly known as a “haircut.” The Greeks are asking for much less than the sums involved in the first two bailouts, namely about 10 billion euros. (The two previous bailouts amounted to about 240 billion euros.) This comes on top of rescuing Cyprus earlier this year. But if it has to be done to save Europe, Germans appear to feel, then Ms. Merkel is the one to do it.  

Indeed, Ms. Merkel is in an unusually auspicious position. The German economy picked up quickly after the 2008 crash and has flourished during the years of the eurocrisis despite the fact that most of Europe was mired deep in recession. In the wake of the financial crisis, economic activity in Germany fell by five percent. Only two years later, economic growth in Germany was back at pre-crisis levels with the economy growing by 4.2 percent in 2010. This year things have slowed down, but Europe’s biggest economy grew by 0.7 percent from April to June; its fastest growth in more than a year outpaced experts’ more modest predictions.

Moreover, as Ms. Merkel pointed out several times in the candidates’ first – and only – televised nationwide debate [Sept. 1], the economy added 1.4 million jobs since 2009 when the conservative-liberal coalition took power. At 5.3 percent, the unemployment rate is at a two-decade low. Export-minded Germany traded more abroad than ever before in 2012, behind only China and the US worldwide.

Ms. Merkel has made adroit use of these figures, which work entirely in her favor. In the debate, watched by 17.5 million viewers, the chancellor looked relaxed and confident, wearing a blue jacket and a beaded, colored necklace. “What we have managed to achieve in these past four years is relatively sensational,” she said.  “We have gone from the worst economic crisis Germany has had in 2009 to the point where we can say in 2015 we will start paying back debt.”

Most Germans feel that Merkel has tenaciously represented their interests on the European stage. Yet, in fact, Germany has made concession after concession to its European partners, backing down after repeated promises to the contrary. This list of flip-flops includes the creation of a permanent bailout fund, a significantly broader mandate for the European Central Bank (ECB), and the direct recapitalization of eurozone banks, among others. A new Greek rescue would come on top of these u-turns.

 Nevertheless, in Germany Ms. Merkel is praised for the tough conditionality that she has imposed on loans, above all those to Greece. In total, bailouts to Greece, Ireland, Portugal and Cyprus total more than 400 billion euros, a hefty chunk of which was picked up by the Germans. If German taxpayers are going to fork out for the Greeks, so the argument runs, the country will have to swallow the bitter pill, namely hard-hitting austerity policies to shrink the public sector.

Ms. Merkel is famous for having compared the keeping of an orderly state budget with the way a “Swabian housewife” runs her family’s budget. (The Swabs, who live in southwestern Germany, are known as penny-pinchers.)

“If Merkel hadn’t insisted upon these countries cleaning up their acts, it might never have happened,” explains Miriam Lau, a commenter at Die Zeit, a newsweekly. “But she said that Greece now has to put in place the same labor market reforms that Germany did a decade ago. This doesn’t sound unreasonable to Germans.” 

What Merkel’s critics call dithering and backtracking, many Germans understand as skillful, tactical negotiating on their behalf.

“Merkel took a lot of time to figure out her position, which also gave Germans time to get used to this wholly unprecedented situation,” explains American journalist Tony Czuczka, co-author of a new English-language biography of Merkel. “She was cautious and methodical like the scientist that she is. She weighed all of the options and then came down on the side of saving the euro. This gave Germans the feeling she didn’t rush to a conclusion.” 

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But this pro-Merkel narrative is by no means the only way to understand the eurocrisis. Many economists on both sides of the Atlantic, as well as Germany’s leftist and new right-wing opposition (and, of course, the southern Europeans themselves) call it a fairy tale made in Merkel-land.  

For one, Germany’s current burst of economic prosperity, say analysts like Janning, is largely due to the tough-minded and at-the-time unpopular reforms carried out by Ms. Merkel’s predecessor, Gerhard Schröder, during his 1998-2005 administration.

“Merkel has reaped the benefits of the Schröder reforms,” explains Janning. “Moreover, the debt crisis in the south allows the German finance minister to refinance ever more German debt at record low rates.” “It’s a lucky coincidence,” says Janning of Merkel’s tenure during the economic recovery.

Indeed, Ms. Merkel doesn’t admit to just how much the German economy has actually benefitted from the crisis. The instability in southern Europe has made German bonds extremely attractive, causing yields to fall to all-time lows. Germany, Finland, Austria, and France have saved billions of euros thanks to the drop in what they pay to raise money in financial markets.

One study calculates that Germany saved 10.2 billion euros in 2010-2012 because of lower borrowing costs. Taking the near-term future into account, the study estimates that Germany’s cumulative interest relief for the German budget would be an astounding $89 billion.

But in the mass circulation newspapers, one hears only the claims that the Greeks and other spendthrift nations are bleeding the Germans dry. The product has been the fiercest tensions within the Union in recent memory. Indeed, anti-German feeling has never been so high across Europe, helping fuel extremist parties like Greece’s openly fascist Golden Dawn, which received a stunning 18 seats in the Greek parliament last year. Almost every country – even Germany now, too – has an anti-EU party that has thrived during the crisis. 

Ms. Merkel’s insistence on dire austerity measures is at the heart of many critics’ reservations about Berlin’s eurocrisis policies. They say that Ms. Merkel’s policies do not give the battered economies of southern Europe the sustenance they require to begin to grow again. As the debt piles up and these countries’ economies shrink, the hole they have to dig themselves out of only gets deeper.

Since they no longer have monetary policy at their disposal, these less competitive countries cannot devalue their currency, as they had during past crises. Now they compete with Germany on German terms. It is illusory of Ms. Merkel, say critics, to think that a country like Greece can prosper with the kind of tight-fisted monetary policy designed for Germany.  

“Austerity, while necessary, is only half of the solution,” explains Janning. “It’s naïve to believe that simply tightening the screws on these economies will make them healthy. This can’t be done by fiscal policy alone,” says Janning, who also criticizes Merkel’s ostracizing of Greece and her visit to the country only this year (where she was met with aggressive street protests and Hitler images).

 Manyw analysts say that Ms. Merkel has been too focused on the German economy, rather than looking out for the welfare of the entire EU, which is in Germany’s interest, too. “Recovery’s not going to happen unless Germany’s neighbors and fellow EU member states pull through, too,” says Joachim Fritz-Vannahme. “Germany does two-thirds of its trade within the EU. We’re in this together.” 

But can the euro economies really grow again while maintaining the common currency with German-style criteria? Although the eurozone officially climbed out of recession this summer as a result of better-than-expected growth, most economists believe it by no means out of the woods yet.

Greece’s economy remains stuck in recession, having shrunk 23 percent in real terms since 2008. Its tax revenues remain well below the level necessary to meet its targets. In Spain, youth unemployment has hit a record 56 percent. Among adults, the 25 percent joblessness is even higher than that in Greece – and there is no sign at the moment of this trend reversing. Since 2010, Portugal, Spain, and Ireland lost two percent of their work force to emigration. Birth rates have plummeted in all of the affected countries.

On top of this, there could be trouble brewing from new quarters. Little Slovenia suffers a failing banking sector and budget imbalances that may require “emergency liquidity assistance” later this year. Ljubljiana almost certainly will not be able to keep its deficit to the 3 percent of GDP stipulated by the EU.  

Mworeover, there are critical policy choices on the horizon that Germany will play a major role in shaping. Probably the biggest is defining a supervisory role for the Frankfurt-based ECB, which will be key to creating a fully fledged eurozone banking union -- a prerequisite to underpinning the common currency. The purpose of the union would be to prevent another sovereign debt crisis, on the one hand, and to create a lifeline to throw to insolvent banks, on the other. If agreed upon, the central bank would assume far-reaching powers to proctor 130 banking groups in the currency bloc. A key aspect of its mandate will be to regularly audit these banks in order to ensure their overall health.

Yet it is Ms. Merkel and Germany that are most coy on the range of the bank’s mandate. So far, Berlin has objected to a common resolution fund on the grounds that such a radical reform requires amending the Lisbon treaty. All 28 member states would have to agree to it, thus initiating a long, drawn-out process that might even take years. In the end, Germany simply doesn’t want to shoulder a disproportionate burden of the entire eurozone’s banking sector.

Given Germany’s centrality to the eurozone, a German chancellor has to address an EU-wide audience, not just Germans, argues independent consultant John Wyles in the European Voice. “Does Europe need a cautious leader running the largest and strongest member state? Or would Europe do better with a German leader less risk-adverse and with a style capable of winning a sympathetic hearing across borders?”

As for the banking union, it’s likely that Germany will eventually succumb to necessity and, as it has in the past, throw in its lot in with its EU partners. Perhaps a new coalition partner might convince Ms. Merkel to be more flexible in terms of debt and restructuring demands.

Whatever the outcome of the election, the banking authority and other issues are on the table and wide open, testament to the fact that the eurocrisis is far from over. As far as Germans are concerned, as long as Angela Merkel is at the helm, they’re in good hands. The rest of the bloc is going to have to play by her rules – as it has no other choice.

Paul Hockenos is the author of Joschka Fischer and the Making of the Berlin Republic: An Alternative History of Postwar Germany.