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Aug 6, 2012 | 11:01 GMT

7 mins read

Germany: Merkel's Challenges for the Coming Year

Germany: Merkel's Challenges for the Coming Year

Despite criticism from abroad, German Chancellor Angela Merkel enjoys high approval rates domestically. Merkel's government has benefited from the fact that Germany's economy has been largely unaffected by the European crisis.

But until parliamentary elections in late 2013, Merkel has two main challenges. First, she must ensure that the European crisis does not spin out of control. This means Berlin will support further aid to struggling eurozone countries while pushing for more centralized fiscal control in Brussels. Pressure from France, Spain and Italy to take more drastic measures will increase, and traditional allies such as the Netherlands and Finland will show some resistance to Merkel's strategy, which calls for further delegation of power to Brussels.

Second, Merkel must maintain her popular and political support domestically. For Merkel, keeping her own party and coalition in check will be as challenging as fighting the opposition, especially if Germany's economy weakens. 

Merkel is currently the most popular politician in Germany. Merkel's Christian Democratic Union together with its Bavarian sister party Christian Social Union would get 36 percent of votes — 2 percent more than in the last elections — if parliamentary elections were held now. The Social Democratic Party, the main opposition party, would get 30 percent. But neither Merkel's party nor the Social Democratic Party would have enough votes to rule alone or with its preferred coalition partners. A coalition between the two largest parties is considered the likeliest outcome.

Voters across most of the political spectrum approve of how Merkel is managing the European crisis. Despite accusations after the recent EU summit that Merkel has given in to pressure from France and the southern periphery, most Germans say Merkel is doing a good job (63 percent in July, up from 60 percent in May, according to polls). So far, Germany has resisted the economic downturn in the rest of Europe, and in a poll from July, 57 percent of Germans considered their own economic situation to be good — a higher number than before the financial crisis. However, with parliamentary elections more than a year away (they are slated for either September or October 2013) and no signs of an end to the European crisis, Merkel faces a difficult task in maintaining these positive numbers for another year while managing the European financial turmoil.

So far, Merkel's double strategy — demanding austerity while agreeing to multiple bailouts to ensure that the eurozone remains cohesive — has worked. However, she probably will not be able to maintain this strategy for another year and enjoy the same support from the population. In dealing with the European crisis, Merkel's government faces increasing scrutiny for democratic legitimacy and faces institutional constraints. Recently, German President Joachim Gauck told Merkel to better explain her crisis policy to the people.

Moreover, Germany's constitutional court has stated that more transparency is required when the government agrees to bailouts in order to maintain the government's democratic legitimacy. The court is assessing whether the European Stability Mechanism, the eurozone's permanent bailout fund, went through the correct ratification process in Parliament. As the crisis deepens, the rescue measures will have to become more extensive. Therefore, the national legal hurdles in Germany will become more relevant to Berlin's attempts to contain the eurozone crisis.

Another pressure point for Merkel will be the status of the German economy. There are signs that the economic crisis is spreading to Germany. The German manufacturing index has not been this low in more than three years, and it saw its fastest decline in three years between June and July. The Ifo Business Climate Index, an early indicator for economic development in Germany, dropped in July. There are also signs that Germany's export-driven economy is receiving fewer orders. While Germany is unlikely to experience the same economic downturn as southern European countries, a weakening of the German economy is more likely than an increase in growth ahead of the parliamentary elections.

European Challenges

The biggest challenge for Merkel in the coming year will be to ensure that the eurozone does not collapse and that the economic crisis does not spread. The eurozone is strategically important for Germany. The common market and currency facilitate access to the consumer base throughout Europe that is vital to the export-oriented German economy. A deep financial crisis triggered by the collapse of the eurozone would threaten her political ambitions, including her own re-election. Although Germany has granted bailouts to preserve the eurozone, in order to show domestic voters that taxpayer money is not being wasted, Merkel will continue pushing for structural reforms and austerity measures in struggling countries. 

Using this double strategy will become increasingly difficult, especially since the next three largest eurozone economies are criticizing Merkel's management of the crisis. Although he is planning to apply austerity measures, Socialist French President Francois Hollande follows a more stimulus-oriented strategy to get over the crisis. France advocates stronger intervention by the European Central Bank in order to suppress bond yields in struggling eurozone countries such as Spain and Italy. Paris does not see the central bank just as a defender of price stability but also as lender of last resort to the government. With the election of Hollande, Madrid and Rome gained a new ally in their struggle against Germany, and both support Paris' call for more intervention from the European Central Bank.

The likelihood that Spain and Italy will need further financial aid is high, even if that assistance is just in the form of suppressing bond yields. While both countries are willing to apply certain austerity measures to gain market confidence, Madrid and Rome are aware that they have great leverage due to their economic size and therefore can count on getting last-minute support should the whole eurozone be at risk of collapsing.

Since avoiding financial chaos and ensuring the stability of Europe's institutional framework are top priorities for Germany, Merkel, despite rhetorical resistance, will be willing to support further rescue measures for struggling eurozone countries (though she will resist as long as possible, as part of the negotiations to strengthen budgetary oversight and fiscal discipline in the struggling countries). Later this year, EU officials will present plans for the further long-term integration of eurozone countries. This will give Merkel the opportunity to call for delegation of power to Brussels and stronger fiscal control to justify further aid.

The troubled peripheral eurozone countries will not be the only ones skeptical of Germany's integration and centralized fiscal control plans. Traditional allies in the call for austerity and structural reforms, such as the Netherlands and Finland, will be skeptical about giving up sovereignty for the sake of the eurozone, especially without proper control mechanisms in the economies of the southern countries. The election of a more leftist government this September in the Netherlands would be a test for Merkel, because the new Dutch government could take a more stimulus-oriented approach and question the fiscal compact Merkel promotes.

Domestic Challenges

Apart from handling the European crisis, Merkel will be increasingly concerned with domestic elections. The regional elections in the states of Lower Saxony in January 2013 and Bavaria in September 2013 will test Merkel's current coalition.

So far the opposition — mainly the Social Democratic Party — has not found a way to challenge Merkel's Europe policy and is struggling to find a challenger to Merkel's position as chancellor. But in recent regional elections the Social Democratic Party has done well, and should the German economy slow, the party likely will blame it on Merkel's indecisiveness in dealing with the crisis.

A further weakening of Merkel's coalition partners, the Free Democratic Party and the Bavarian Christian Social Union, would aid the opposition. Polls indicate that the liberal Free Democrats would not even make it into Parliament, and the Bavarian party will be challenged in regional elections just prior to national elections.

As the Free Democrats and the Christian Social Union struggle to secure voters, more rhetorical differences will arise among the government coalition parties. Within her party, Merkel faces no real challenges to her position as party leader, although the more conservative forces are concerned about Merkel's bailout policy. During the recent parliamentary ratification process of the European Stability Mechanism, Merkel had to rely on the opposition's support to get the bailout fund approved.

It will become increasingly difficult for Merkel to operate in an environment where more drastic European rescue measures are required while her political base within the party is questioning her strategy.

Merkel has a troublesome year ahead, and next year's parliamentary elections will be more about Germany's plans for Europe then ever before. Whoever is leading Germany in 2013 will face the problem of ensuring survival of the European structures while gaining further control over other countries' budgets to justify spending German taxpayers' money.

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