Bloomberg News

Merkel’s Choice Pits European Fate Against German Voter Interest

June 12, 2012

Germany's Chancellor Angela Merkel

Angela Merkel, Germany's chancellor. Photographer: Jock Fistick/Bloomberg

The night the Berlin Wall fell, Angela Merkel joined thousands of East Germans who pushed west over the border crossing at the Bornholmer Bridge, helping sweep away almost half a century of Cold War division.

Merkel, 57, is again at the nexus of history -- this time as its agent and leader of Europe’s dominant country. The union built out of the ashes of World War II faces an existential threat and the common currency she champions is at risk of collapse. Critics at home and abroad blame Merkel, saying she has invited disaster by bowing to public opinion and refusing to do enough to help Europe’s weakest links pay their debts.

“We’re at a crossroads,” Horst Teltschik, who advised then-Chancellor Helmut Kohl during the diplomacy that led to the reunification of East and West Germany in 1990, said in an interview. “The question is what’s politically important and historically necessary. Do I want further integration? Only then do you ask what it costs.”

A pastor’s daughter, Merkel served the final premier of East Germany and the first chancellor of the reunited country. As the first German leader born after the war, Merkel’s choice now is between taking on what previous chancellors saw as Germany’s postwar responsibility to build European unity, by using its checkbook if necessary, and a domestic public that is increasingly ambivalent about the need to do so.

German Vision

“German history teaches us compellingly that isolation would spell disaster,” Heinrich August Winkler, a historian at Berlin’s Humboldt University and author of two volumes on modern Germany, said in an interview. Faced with “the European Union’s biggest challenge yet,” German policy makers now need to display “a bit of vision.”

As she prepares for a June 18-19 summit of world leaders in Mexico and European crisis talks 10 days later, Merkel’s response to the turmoil that began more than two years ago affects everything from Greece’s fate to President Barack Obama’s re-election. Her future as chancellor and her political legacy are also at stake.

Merkel is stepping up her calls for closer “fiscal union” in Europe to tackle the debt crisis at its roots. Greek elections in four days threaten to herald the first expulsion of a country from the 17-nation currency union. That would provide the first test of a 100 billion-euro ($125 billion) financial backstop for Spain and push the chancellor to signal whether she’ll do more to halt the turmoil.

Following Kohl

Merkel is a convert to the ideal symbolized by Kohl, who is credited with achieving German reunification after 41 years of division. Merkel grew up under communism in the east and became Kohl’s protégée after the Berlin Wall fell in 1989, joining the Christian Democratic Union party that anchored West Germany’s pro-European stance after World War II.

“There is no doubt that she sees herself in this tradition,” Winkler said. “Every German government with a good understanding of German interests has a duty to push ahead with the European project” and ensuring that Europe has democratic legitimacy.

Merkel’s own history is intertwined with the optimism- filled days of liberation after communism collapsed. A trained physicist, she was 35 when she joined those crossing to West Berlin on the night of November 9, 1989. Local authorities estimated that 20,000 people thronged past the barrier at the Bornholmer Bridge within an hour.

“We weren’t the first in Germany, but we were there when the Cold War collapsed,” Merkel said in 2009 at the same spot, where she chose to mark the 20th anniversary of the fall of the wall. “It was one of the happiest moments of my life,” she said later that day. Merkel declined to be interviewed for this article.

Seizing the Moment

Kohl, then West German chancellor, seized the moment from the opposite side. He persuaded doubters led by British Prime Minister Margaret Thatcher to back the reunited Germany that would become Europe’s dominant country, and sealed the deal within 11 months.

Merkel, by then active in East German pro-democracy politics, joined his Cabinet after Kohl won the first post-unity election in December 1990. Merkel had become a public figure as deputy press secretary for Lothar de Maiziere, the east’s only freely elected prime minister.

“Everything I do, I do out of the firm conviction that Europe is our good fortune, a good fortune we must preserve,” Merkel said in an interview with three European newspapers in January. “I suffered for 35 years, until the Wall fell, from not being able to just go to Western Europe. That was my dream. This is my continent.”

Austerity Capital

Yet under Merkel, the reunited Berlin has shifted from the symbol of unity to the capital of austerity that is driving a wedge through the euro region. She has endured vilification and Nazi-era comparisons in Greece in the name of protecting German taxpayers. She lost her closest crisis-fighting ally, Nicolas Sarkozy, after Socialist Francois Hollande beat him to the French presidency in May on a platform of ending Merkel-inspired budget cuts.

Her refusal so far to do more to preserve Europe leaves her increasingly isolated, while record-low German borrowing costs underscore the strain in the euro region. Germany sold two-year debt at a negative yield on June 3, a first that underscores investors’ desire for security over returns. Equivalent Spanish debt yields rose to 4.65 percent yesterday while the yield on Italian two-year debt was at 4.37 percent.

Tipping Her Hand

Proposals in the potential endgame to save the 13-year-old currency range from issuing shared euro-area debt to lower borrowing costs for governments in southern Europe, to using EU money to spur growth in nations struggling under budget tightening demanded by Germany in return for aid. Germany would face extra costs of 47 billion euros a year through the alignment of interest rates with nations that pay more to borrow, the Munich-based Ifo institute said on Aug. 17.

While Merkel repeats her resistance to joint euro bonds, she has given some hints of what she might be prepared to consider, leaving the door open to a European fund that would help governments scale back outstanding debt, an idea floated by her council of economic advisers, and more centralized EU bank regulation.

She has ramped up her support for deeper political and economic integration in the euro region, backing EU President Hermann van Rompuy and European Central Bank chief Mario Draghi as they draft proposals on fiscal union by the June 28-29 EU summit. To her, that means more centralized policing of over- spending by national governments.

Niagara Falls

Former German Foreign Minister Joschka Fischer blamed both Merkel and Hollande’s influence on policy making for the impasse. “The major players are still in a state of denial,” he said during a panel discussion on May 30. “It’s like you can hear the Niagara Falls and Mrs. Merkel is opening umbrellas.”

Fischer, who defied his Greens party by sending troops into the war for Kosovo in 1999 in the name of solidarity with allies, said Merkel will have to agree eventually to underwrite common debt.

“We will get euro bonds,” he said. “It’s not a matter of whether or not, it’s a question of timing.”

For all the pressure, Merkel has another constituency: German voters, who go to the polls in September next year. As the turmoil in the euro zone tugs at the EU’s seams, the resilience of Europe’s biggest economy means Germans have remained immune from the recession that the European Commission predicts will afflict the entire bloc this year.

Germany posted growth of 0.5 percent in the first quarter. Unemployment dropped to 6.7 percent in May, the lowest since reunification. In France the rate is 10 percent, while Spain is fighting 24.4 percent, the highest in Europe.

Exports Boon

The euro, combined with wage restraint that Germans say was flouted in bailed-out countries, has benefited German exporters by keeping the country’s real exchange rate between 15 percent and 20 percent lower than if it had kept the deutsche mark, Citigroup Global Markets analyst Nathan Sheets estimated in a Jan. 27 note to clients.

Voters continue to say Merkel is their favorite politician. While her party has lost ground at state elections since the crisis began, the CDU leads the main opposition Social Democrats by 4-6 percentage points in national polls.

Eighty-three percent of Germans would want Greece to leave the euro area if the country reneges on its economic reform commitments, according to an Infratest Dimap poll for ARD televion. The May 5-6 poll of 1,001 people has a margin of error of as many as 3.1 percentage points.

Voter Trust

“Germans tend to trust Merkel and Finance Minister Wolfgang Schaeuble to make the best of the crisis,” Joachim Koschnicke, a partner at the Berlin-based Forsa polling firm, said by phone. “She has public support for rejecting euro bonds. If she blinks on that, she risks losing support for her crisis policy.”

Merkel may be more forthcoming after June 17 elections in Greece and in France, where Hollande is looking to consolidate his May 6 presidential victory in parliamentary voting, said Holger Schmieding, chief economist at Berenberg Bank in London. She may, for instance, open the door to joint deposit insurance, he said in an interview.

“The German policy response will always rise to the occasion, but it’s not that all of a sudden Germany will change everything and take over all the debt,” he said. “It just won’t happen.”

As weaker-than-forecast economic data in China, Japan and the U.S. are blamed on the crisis, the chancellor is pushing back, saying there’s no “big-bang” solution. Tackling the fallout requires “a lot of stamina,” she says.

Changing Tack

Merkel has shown herself adept at changing tack as events require.

She dropped her opposition to bank bailouts in October 2008 after an industry-led rescue of Munich-based Hypo Real Estate Holding AG collapsed and the government had to step in. She backtracked and agreed to a lifeline for Greece in May 2010, sparking public anger that cost her control of Germany’s most populous state. Merkel took flak in March 2011, losing a state her party had held for more than 50 years after she reversed her support for nuclear power.

As she contemplates her next step from her seventh-floor office at the Berlin chancellery, Merkel has a panoramic view of the line that split the city and once symbolized all Europe’s division. Behind the desk she has occupied since 2005 hangs a portrait of Konrad Adenauer, the first postwar chancellor and godfather of West Germany’s economic revival and reintegration into Europe after Nazi rule.

“I do believe that she is a European by conviction,” said Teltschik, who is no longer in politics. “Merkel can move amazingly quickly and depressingly slowly. She never announces strategic decisions much in advance. But when she spies a turning point, she makes up her mind.”

To contact the reporter 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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