Germany had held the key to an orderly resolution of the European Union's
sovereign debt crisis. Yet Chancellor Angela Merkel's government faced hostile
questioning in the Bundestag, the German parliament, and even a legal challenge
in the constitutional court, before it managed to sign off on the rescue
package by Friday, April 30. Bundestag members were incensed over the
government's lack of transparency in negotiating the deal and the rumored size
of German commitment in the rescue package.
Defending her earlier posture in refusing to allow a timely bail-out plan for
Greece without International Monetary Fund (IMF) involvement, Merkel said it
would have been "unthinkable" that Athens would live up to such tough
conditions three months ago without IMF discipline. She said that involvement
of the IMF, the subject of strong disagreement within the German government,
was necessary to give the program "maximum credibility" around the world,
notwithstanding that IMF credibility in previous financial crises had fallen to
junk status.
The 16 eurozone countries and the IMF on May 2, 2010, agreed to release 110
billion euros (US$146 billion) in "unprecedented" rescue loans to Greece, 1.3
billion euros of which will come even from cash-strapped little Ireland.
Irish Minister for Finance Brian Lenihan, who did not attend the meeting, said
that Ireland stood ready to play its part, adding that the government was
preparing legislation to release bilateral loans to Greece. "Today's decision
will help safeguard the stability of the euro area as a whole and this
stability will benefit all euro zone member states," the minister said of the
110 billion euro package.
Having agreed a fortnight earlier on April 25 to provide up to 45 billion euros
to Greece in the first year of the rescue, the European and IMF authorities
responded to extreme market pressure on Friday, May 2 to set out for the first
time the overall value of 110 billion euros for the emergency package.
The deal to activate the rescue, struck at an extraordinary meeting of eurozone
finance ministers, came as Greece agreed to intensify efforts in the next three
years to bring its budget deficit under control. Taxes will rise, public sector
pay will be cut and the pension age will be increased under the plan.
The pact follows months of market pressure on Greek borrowing costs and
mounting fear of financial market contagion bringing fiscally weak countries
such as Spain, Portugal and Ireland under pressure on their sovereign debts.
Merkel's failed leadership
While Merkel had played for time during key talks in the previous 10 days, she
changed stance on April 28 to call for a swift agreement, after markets fell
sharply in response to a rating downgrade of Greece sovereign debt on April 27.
Although most Germans were also opposed to the rescue and Merkel was facing a
difficult regional election on Sunday, May 9, she characterized the rescue plan
she now supported as an effort to secure monetary stability in the eurozone.
Merkel initially held out on agreeing to aid the nearly insolvent and
liquidity-starved Greece, prompting German opposition parties to accuse her of
avoiding an unpopular decision in the election run-up. Two days before a May 9
election, and two days after the violent demonstration in Athens, at the
desperate urging of Merkel, parliament approved on Friday, May 7, a bill
allowing Germany to grant as much as 22.4 billion euros in credit over three
years as part of a wider rescue plan to Greece.
As it turned out, Merkel failed in her two-pronged objective. The market viewed
the May 2, 110 billion euro package as grossly inadequate, and share prices
fell sharply on the following Monday and continued throughout the week.
Politically, Merkel also suffered a major setback in an important regional
election. In the state election on May 9, in Germany's most populous state,
North Rhine-Westphalia (NRW), a region of some 18 million people that includes
Cologne and the industrial Ruhr area, voters dealt Merkel's Christian Democrat
Union (CDU) a painful setback, erasing her government's majority in the upper
house of parliament and curbing its power after a stumbling start and criticism
over the Greek debt crisis. Merkel's center-right alliance was voted out of
power in a state election. It was the first electoral test since Merkel began
her second term in October 2009.
It was the CDU's worst election result since World War II in Germany's most
populous state and the loss undermined the prospect of legislative approval of
tax cuts and extension of the lifespan of nuclear-power plants.
Officials in Merkel's CDU blamed the party's poor showing on the large German
loans for Greece passed by parliament on May 7 in the face of broad public
opposition. Merkel was widely criticized at home and abroad for first refusing
to support aid to Greece, taking the position that the crisis in Greece was a
local problem, and then pressing German lawmakers to back Germany's
contribution to the 110 billion euro lifeline as the fear of contagion outpaced
other concerns.
Almut Moeller, head of European policy at the German Council on Foreign
Relations in Berlin, said in a press interview that Merkel has become
vulnerable politically, adding: "After her record of dithering over help for
Greece, she really needs to make a show now of strong, resolute policy in
Brussels to help stem the crisis from spreading further. The last thing the
eurozone needs at this point is weak German leadership."
Yet, the election defeat weakened Merkel's ability to exert strong leadership
both at home and abroad. Foreign Minister Guido Westerwelle, the vice
chancellor and leader of the Free Democrats, Merkel's junior coalition partner,
said after the election: "This is of course a warning shot for the governing
parties, and the people should know that it has been heard. We must make an
effort to win back lost trust."
Merkel's conservative CDU won 34.5% of the vote - more than 10 points fewer
than five years ago - and the Free Democrats 6.8%. The coalition, whose makeup
mirrors that of the national government, finished well short of a majority in
the state legislature.
The main opposition Social Democrats finished with 34.5% and the Greens 12.1%.
A hard-left rival, the Left Party, won 5.6%. A coalition of the three minority
parties is not a particularly likely prospect except under conditions of strong
public discontent in the event of further economic deterioration of the EU.
It was not immediately clear who would run North Rhine-Westphalia and whether
conservative Juergen Ruettgers could cling onto the governor's office in
Duesseldorf. The Social Democrats hoped to run the state with the Greens, but
it wasn't clear whether they had won enough seats to gain control.
Merkel's conservative Christian Democrats will have less political space to run
Germany - the EU's biggest economy - without a majority in the upper house,
which represents Germany's 16 states and must approve major legislation. To
govern, Merkel will have to compromise with the opposition policy positions and
accept diminishing ability to push through tax cuts as a means of stimulating
the economy and to carry out significant reform to the health-insurance system,
the implementation of both being part of the core positions of the Free
Democrats whose support Merkel needs.
Merkel's federal government currently controls 37 of the 69 upper-house votes,
including six from North Rhine-Westphalia. Its stock has slid following a poor
start, constant squabbling over key policies and the challenge from the Greek
crisis and its effect on the euro. A senior Merkel aide said after the election
that the setback had many causes - among them local problems and "too much
unnecessary arguing on the public stage". German democracy has reduced the
strength of German leadership at a time when such strength is imperative. The
Christian Democrats' general secretary, Hermann Groehe, also pointed to "the
general uncertainty, people's concerns with a view to the stability of the
euro, the situation in Greece".
Greece only a headline issue
While Greece was the headline issue, a more fundamental problem with German
voters was the Merkel government's stumbling start in dealing with problems at
home. Freed last year from a "grand coalition" with the opposition Social
Democrats in which she shone as a consensus-builder, Merkel then got bogged
down in internal divisions - notably about the controversial proposal of big
tax cuts in a recession that will add to the government's fiscal deficit. In
response to the spreading and deepening Eurozone sovereign debt crisis and a
resounding election defeat for the ruling coalition in North Rhine-Westphalia,
the Merkel government has since removed tax cuts indefinitely from its agenda.
The last thing Germany needs now is to increase her public debt.
Without an upper-house majority, Merkel may be forced to again focus on
consensus-building, a regular fixture in post World War II German politics.
Merkel's first term had been consumed with consensus-building. Opposition
parties are against tax cuts and other controversial plans such as extending
self life of nuclear power stations. Social Democratic opposition leader Sigmar
Gabriel told the press that the election setback was "a good signal ... that
North-Rhine Westphalia has declared by popular vote that this isn't how we want
to live in Germany". Gabriel said it was a "turning point" for the Social
Democrats, who are still recovering from a heavy national election defeat in
September 2009. They led North Rhine-Westphalia for nearly four decades until
losing it in 2005 amid discontent over then-chancellor Gerhard Schroeder's
efforts to trim the welfare state.
Merkel lost her important state election not because of voter anger over the
Greek bailout. Ruettgers, the CDU prime minister of North Rhine-Westphalia, was
trailing in the polls long before the Greek crisis broke, primarily because of
a party financing scandal. Also, Merkel's coalition partner, the FDP, has
dramatically lost in popularity for insisting on unpopular tax-cuts that will
threaten Germany's long welfare state tradition and balanced budgets.
The outcome of a dramatic weekend for Merkel is a near disaster for Europe's
most powerful leader. She missed a great opportunity for assuming the
leadership needed to steer the EU out of its most difficult crisis.
Haunted by the potential adverse impact of Greece's near insolvency on the EU
leaders put together a 750 billion euro rescue package in negotiations on
Sunday, May 9, that lasted in to the morning of May 10, to try to stabilize the
teetering economies of the euro-using nations heavily burdened by debt - but
the driving force behind that package was French President Nicolas Sarkozy, not
Merkel.
Merkel's CDU, fresh from the North Rhine-Westphalia election defeat, was a
wounded participant in the meeting of EU leaders as election results came in
while the final decision was approaching. The NRW Bundesland (state
government), Germany's economic powerhouse, was no longer in the hands of the
same conservative and liberal coalition that had ruled the federal government
in Berlin. Germany was no longer represented in the crucial EU meeting by a
leader who enjoys the undivided support of her people.
The linkage between the Greek crisis and turmoil in German domestic politics is
indirect but significant. The failure of German leadership in the EU was
publicly demonstrated as events unfolded.
Three months earlier, it already was clear that Greece was unable to handle its
exploding budget deficit without help. The other Eurozone member states
discussed for more than a month what was needed to be done to help Greece and,
by March 25, put forth a mixed bag of financial aid with the IMF agreeing to
step in as the emergency relief team. At that point, Merkel squandered the
chance to take the stage to be the strong political leader of the hour. She
failed to tell the German people that helping Greece financially before the
situation got out of control would prevent deep losses to all within the
eurozone, particularly Germany.
Germany last year had a 4.8 billion euro trade surplus with Greece, its second
biggest customer in military exports. German private banks have acquired Greek
government loans worth 30 billion to 40 billion euros. Thus a collapsing Greek
market would hit Germany's economy hard, even without the inevitable effect of
contagion to other eurozone member states to which Germany also enjoyed trade
surpluses. Most significantly, Merkel failed to tell German voters that the
Greek sovereign debt crisis is a critical test for the euro's future.
International market confidence on the commitment of the 16 euro-zone countries
to defend the stability of their common currency will be shaken by a failure to
bail out Greece's euro debts.
Instead of offering strong and timely leadership, Merkel acted like an
opportunistic politician and tried to buy time by downplaying the gravity of
the crisis and the probability and importance of the need for Germany to help
bail out Greece for Germany's own sake. She allowed popular dislike among the
conservative majority of German voters on the idea of aiding a socialist EU
member nation that has been squandering borrowed money since joining the EMU,
and had openly betrayed EU institutions with false budget accounts,
notwithstanding that many other Eurozone member states were also guilty of the
same sins.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
