Merkel and Germany: Take Three

By Elizabeth Pond

Yes, it was a soporific campaign that led to Sunday's coronation of Angela Merkel as Germany's third-term German chancellor and (still) the world's most powerful woman. But no, that doesn't mean stagnation in Berlin's foreign policy. As skillfully as she buried any policy debates under platitudes in her vigorous pursuit of votes this past month, Merkel has already planted the seeds of policy change, especially in dealing with the European Union and the euro zone.

The probable "grand coalition" between her center-right conservatives (41.5 percent of the high 72.5 percent turnout) and Germany's other big party, the center-left Social Democrats (25.7 percent) won't affect her policy calculus. Even as the parliamentary opposition during the past four years of euro crisis, the Social Democratic Party (SPD) basically supported Merkel's slow, reluctant bailouts of financially strapped euro zone members in return for such tough domestic reforms in Greece, Spain, Portugal, and Italy as really collecting taxes, raising the retirement age, and curtailing the excesses of crony capitalism. And the SPD, while periodically calling for more stimulus and less austerity in recipient countries in vain, watched in amazement as Merkel committed rich Germany to ever more financial obligations to keep the euro zone from breaking apart—but at the same time increased her overwhelming popularity with German taxpayers.

Nor will Merkel be constrained by the novice anti-euro party called Alternative for Germany. This party, with its single-issue protest against the decade-old single-currency euro union among consenting EU members, did surprisingly well for a start-up. It won 4.7 percent, but it fell short of the 5 per cent minimum needed to enter the Bundestag.

Nor, to her regret, will Chancellor Merkel even have to cater to the special interests of her erstwhile coalition partner, the Free Democratic Party (FDP), the champion of small business entrepreneurs. Merkel's popularity attracted just enough crossover voters to deprive the FDP, for the first time in its proud 64 years, of the 5 per cent minimum for parliamentary seats. As a result, the nation-wide niche FDP has probably now been consigned to the dustbin of history. In the long run, the strategic loss of their natural partner could haunt the conservatives, but in the short run of the next four years, the FDP's absence strengthens Merkel's solo leadership.

With her hands now free, the policy areas in which Merkel has already hinted at forthcoming changes might be summed up as Greece, France, and the European Union.

Clearly the first beneficiary of a German policy shift will be Greece. Athens faces imminent bankruptcy unless it gets another financial transfusion. During the campaign Merkel banned all public talk of the next step, but members of her team made it known that she could be persuaded to open her check book again once her  new government is in place.

This is significant, as earlier bailouts of Greece have been essentially cost-free for German taxpayers. Berlin has not yet had to ante up on its guarantees of Greek financial solvency. Its—and the European Central Bank's—determination to do "whatever it takes" to keep heavily indebted Greece within the euro zone have sufficed to keep Greek bond yields tolerable, and the euro zone as a whole is finally showing signs of renewed growth that could eventually lift all boats.

At this point, however, economists expect the next urgent package to save Athens to come with a price tag. There is already talk in Germany of the contribution that holders of Greek bonds (including many German banks) must pay in accepting "haircut" losses on rescheduling of the debts. This suggests that the German paymaster will have to dole out real money for the first time in providing the next tranche of support.

France is a different story. Personal and policy tensions between the classical Socialist President Francois Hollande and the cautious Christian Democratic Chancellor Merkel are already legendary. Merkel's approach to France over the past half year has basically been to put all joint business on hold until she could come back with a fresh mandate from her voters—and convince Hollande that he simply will have to deal with her for the next four years and must give up his dreams of expanding stimulus and social spending by incurring further debt.

With her resounding mandate on Sunday, Merkel now expects to see change in bilateral relations—on the part of Paris rather than Berlin. She wants Hollande to adjust at last to German ideas of fiscal responsibility that have given Germany the globe's third-largest economy. She wants him to return to the 1980s free-market reforms of his Socialist predecessor, Francois Mitterrand, and restart the stalled French convergence upward toward German economic performance. And on this basis she wants to restore the traditional Franco-German "motor" for Europe. Under this system, any policy compromise reached by Germany, a spokesman for stricter northern economies­, and France, spokesman for laxer southern economies, has generally been accepted by their respective regions.

On European institutions, Merkel has quietly dropped her proposal of two years ago that the EU agree on treaty changes to form an EU political union to police economic discipline of the sort she has extracted from poor euro zone performers as their price for bailouts. By now she has come to rely on ad hoc inter-governmental deals between sovereign states instead of any strengthening of the European Commission's supranational powers to enforce fiscal rectitude in the euro zone.

This issue too will require French-German compromise. Formally, Merkel's new position corresponds with French abandonment of its own insistence on a potentially dirigiste EU political union to oversee the currency union during the acrimonious formation of the euro zone in the 1990s. In substance, however, Paris is by now unhappy with both supranational and inter-governmental models of EU governance, since either way, Berlin's sheer economic weight—and not Paris's diplomatic skill—will dominate Europe.

Chancellor Merkel's intended post-election policy changes are perhaps incremental—but they are nonetheless seminal.



Elizabeth Pond is a Berlin-based journalist and the author of The Rebirth of Europe.

[Photo courtesy of Glyn Lowe]

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