Bloomberg News

Merkel Signals She’ll Dodge Coalition Breakup ‘Disaster’

September 20, 2011

(Updates with Italian downgrade in third paragraph, Merkel, Obama call in fourth. See EXT4 <GO> for more debt crisis news.)

Sept. 20 (Bloomberg) -- German Chancellor Angela Merkel said she’ll hold the government together even after her coalition partner defied a call to stop talking down Greece and was flattened in a state election.

“We will continue our work as a government and I don’t think it’s become more difficult,” Merkel told reporters in Berlin yesterday. “The coalition is on the job and we have a whole lot of tasks ahead. All coalition partners know what their task is and will pursue them with great diligence.”

The task at hand was underscored as Standard & Poor’s downgraded Italy’s credit rating, sending the euro sliding. The government in Slovenia, a euro member since 2007 that Merkel visited three weeks ago, meanwhile faces a confidence vote today that it may not survive, threatening to delay approval of an overhaul of the European rescue fund that Merkel has backed.

Merkel and President Barack Obama discussed the euro-region crisis and financial-market developments in a phone call overnight, agreeing that “concerted action would be needed in the months ahead to address the current economic challenges and to assure global economic recovery,” according to a White House statement.

Domestically, Merkel is struggling with a weakened Free Democratic Party coalition partner that’s flirting with an anti- bailout stance to try and bolster its popularity. The FDP lost all its seats for the fifth time this year at a state election in Berlin two days ago after turning skepticism over euro-area rescues into a campaign theme. The main opposition Social Democrats and Greens demanded an end to Merkel’s coalition and offer to work with her on tackling the debt crisis.

Crisis Management

Open conflict in Merkel’s three-party alliance has erupted over the euro’s future and financial aid to Greece, stoking speculation that she may end the coalition midway through her second term. As 82 percent of respondents to a poll in this week’s Spiegel magazine said the government’s crisis management is “bad,” the FDP, or liberals, bore the brunt of voter anger.

Merkel is still unlikely to call elections before they are scheduled in 2013 or accept the Social Democrats’ offer to switch coalition partners, Gerd Langguth, a political scientist at Bonn University and Merkel biographer, said by phone.

‘Nervous and Incalculable’

“Merkel will want to keep the FDP on board” and avoid an early election that would be “a disaster” for her coalition parties, said Langguth. The FDP has lost so much support that it’s “very nervous and incalculable,” he said. “That’s the danger for Merkel. Still, I don’t expect the FDP to leave the government.”

Free Democratic Party backing nationally has collapsed to about 5 percent, the threshold for parliamentary seats, after a record 14.6 percent in the September 2009 election as the debt crisis forces a dilemma on the party of Hans-Dietrich Genscher, the foreign minister who helped forge German and European unity.

With a change of leadership failing to halt the decline, a group of lawmakers skeptical of bailouts is gaining traction within the party, threatening to disrupt parliamentary votes on the European rescue fund and its permanent successor from 2013, the European Stability Mechanism.

“The issue now is how long the liberals hold onto the coalition, whether they break it off ahead of time,” Nils Diederich, a politics professor at Berlin’s Free University, said in an interview. “But I don’t think they will.”

German ‘Duty’

Economy Minister Philipp Roesler, who took over the party chairmanship from Foreign Minister Guido Westerwelle in May, put an “orderly default” for Greece on the table last week, roiling financial markets and earning him rebukes from members of Merkel’s Christian Democrats.

Merkel responded by sharpening her arguments in defense of the euro, saying Germany has a “duty” to preserve the joint currency because it helps exports, makes the country richer and underpins Europe.

“Words must be weighed carefully in dealing with the euro crisis -- that applies to everyone,” Merkel said yesterday when asked about Roesler’s position. “We must have the resolve to master the debt crisis. We shouldn’t do anything with an incalculable outcome. That applies to one’s own party, the coalition partners and certainly also to the opposition.”

‘Collective Liability’

Bundesbank President Jens Weidmann, who was Merkel’s chief economic adviser until moving to the central bank in May, said the expansion of the rescue fund’s powers agreed by EU leaders in July risks increasing the burden on “financially strong countries.”

“These decisions are another big step toward a collective liability and reduce the disciplining function of capital markets without strengthening control and influence on national fiscal policies in return,” Weidmann, who also sits on the European Central Bank’s governing council, said in written testimony to the German parliament’s budget committee.

The FDP won just 1.8 percent of the vote in Berlin, the last of seven state elections this year that have seen the coalition parties punished over their handling of the debt crisis. The FDP result was its worst in the German capital since World War II, and compared with 8.9 percent for the Internet- freedom campaigning Pirate Party.

Playing on voter concern about the debt crisis backfired because voters saw it “as ‘calculated populism,’ and Germans don’t like that,” Langguth said. Even so, the Social Democrats’ offer to help Merkel out is “hot air.”

--With assistance from Patrick Donahue and Brian Parkin in Berlin. Editors: Alan Crawford, James Hertling

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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