Dec 15, 2010 | 21:43 GMT

6 mins read

German Domestic Politics and the Eurozone Crisis

Germany's land of Hamburg will hold an election Feb. 20, 2011, after a political crisis led to the dissolution of its parliament. The next month, three other laender will hold elections. The domestic political situation will distract Berlin from other matters, particularly as German Chancellor Angela Merkel's Christian Democratic Union is attempting to hold on to coalition governments in three of the four laender holding elections. With Germany bogged down in domestic political campaigning, Merkel may be less able to focus on managing the eurozone crisis.
A political crisis in the German land of Hamburg (the city has the status of a land, or state) led the land's legislature to dissolve itself after the Christian Democratic Union (CDU)-Green party coalition collapsed. New elections are scheduled for Feb. 20, 2011, approximately a month before three other laender hold elections. The elections raise the likelihood that Germany will be embroiled in domestic political campaigning from now until April. This will make it more difficult for German Chancellor Angela Merkel to focus solely on managing the eurozone crisis, as illustrated by the elections held in North Rhine-Westphalia in May amid the Greek sovereign debt crisis.

Germany's Laender Elections

German laender are politically some of the most powerful federal entities in a major Western democracy. The laender legislatures are directly represented in the Bundesrat — colloquially referred to as Germany's upper house — by representatives whose voting powers are based on their land's population. The political balance in the Bundesrat therefore directly depends on the makeup of the laender legislatures, giving both the legislatures and laender prime ministers considerable federal influence. The laender are also in charge of a substantial portion of the German budget — the central government only accounts for around 30 percent of total government revenue — as well as how EU funds are distributed in the country. Hamburg's election takes place not long before regularly scheduled elections in the laender of Saxony-Anhalt (March 20), Baden-Wurttemberg (March 27) and Rhineland-Palatinate (March 27). Merkel's CDU is in a coalition government in both Saxony-Anhalt and Baden-Wurttemberg, as well as in Hamburg. The CDU-Green coalition in Hamburg was in fact considered the test case for a potential national coalition between the two parties at some point in the future. That it prematurely failed illustrates the fundamental differences between the two parties. The CDU's only partners at the federal level are its Bavarian sister party, the Christian Social Union, and the Free Democratic Party (FDP). The laender elections are important because they will force Merkel to concentrate on campaigning instead of on managing the ongoing eurozone crisis. The last time the German chancellor did that — in early 2010, ahead of the May 9 elections in North Rhine-Westphalia, which the CDU lost — she was forced to talk tough on the possibility of a Greek bailout. Voters of the center-right CDU are traditionally more skeptical of Germany's leadership role in the European Union if that role means signing checks for the rest of Europe. Merkel was therefore caught having to speak to two audiences, as a high-ranking German diplomat recently told STRATFOR — having to reassure investors and fellow EU countries that Germany would stand by the euro while reassuring CDU voters that Berlin would not spend a pfennig on bailing out the Greeks. It is not surprising that the European Union finalized the Greek bailout on May 10, the day after the CDU lost the North Rhine-Westphalia elections. The Greek crisis, however, started in January, and the extra four months probably raised the price of the eventual bailout. Following two bailouts and the setting up of the 440 billion euro ($580 billion) European Financial Stability Facility, it is not clear that the electorate will force Merkel to take as tough of a stance this time around. However, the situation in the eurozone is still unclear. Following the Irish bailout, the financial situations in Portugal, Spain and increasingly Belgium are coming into focus. Every small issue seems to make investors nervous, and the euro is in the focus daily. Berlin's leadership is therefore still needed, and the prospect of Merkel's having to deal with two audiences again — even if the rhetoric is not as sharp as before the Greek bailout — is not reassuring.

Problems for Merkel's Party

Causing further concern is the CDU's unpopularity in polls despite its considerable domestic economic successes. The latest nationwide figures show the center-left Social Democratic Party (SDP) and the Green party together ahead of the CDU and its partner, the FDP. The latter is threatened with not even crossing the 5 percent parliamentary threshold and is facing a leadership crisis, with calls within the FDP for the incumbent, German Foreign Minister Guido Westerwelle, to resign. Meanwhile, Germany's economy is expected to grow around 3.6 percent in 2010, a number that far outpaces the rest of the developing countries, especially in Europe. Furthermore, unemployment in Germany has actually reduced since the economic recession, down from 8.4 percent in 2007 to 7.1 percent in 2010 — compare that with the United States, which has seen unemployment grow from 4.6 percent in 2007 to 9.7 percent in 2010. The positive unemployment figure is largely the function of the short-shift scheme implemented by the CDU-FDP federal government, which allowed employers to keep on their labor force due to government support. Most Western politicians would feel secure in their position with that kind of economic performance amid uncertain economic times. Considering the German economy's performance, the CDU's poor poll numbers suggest that one of the reasons its voters are losing patience is Merkel's performance on the European stage, particularly the extension of two bailouts to peripheral states. A June poll in Germany supports this claim, with as much as 50 percent of the population in favor of going back to the deutsche mark, despite the benefits the euro has afforded the German economy. The danger for Europe is that Merkel and the CDU will attempt to compensate for the poor national polling by campaigning hard to their voters in the upcoming four laender elections — the same strategy employed for the North Rhine-Westphalia elections — to the extent that the CDU-FDP government will remain committed to not extending a blank check to fellow eurozone countries. An even greater destabilizing move would be if Merkel feels compelled to call early federal elections if the CDU performs poorly again in the laender elections — her predecessor, Gerhard Schroeder, did the same after his SDP lost the North Rhine-Westphalia elections in 2005. This is not expected; early elections are frowned upon in Germany, and governments are expected to last their entire term. However, were it to happen, it would launch Germany into a period of introspection and limit its ability to put out fires on the Continent. German politics could therefore add another variable to the already long list of potential issues for the eurozone in 2011.

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