Germany's Elections and the Eurozone

Germany's state of Hamburg (the city has status as a state) is holding elections Feb. 20. This is the first of seven state elections to be held in Germany in 2011; three are scheduled for March, one for May and two for September. State elections have considerable effects on federal politics in Germany, more so than in most Western democracies. Since Germany will hold seven elections spread out throughout the year, the country is essentially in all-out election mode until September. This means that domestic politics will have considerable effects on how Berlin formulates its foreign and EU policy (as has been the case many times before). Chancellor Angela Merkel, her ruling Christian Democratic Union (CDU) and especially her pro-business minority partners the Free Democratic Party (FDP) are facing a six-month test that will distract the government and force it to balance its rhetoric between internal and external audiences.

German State Elections

(click here to enlarge image) The Bundesrat — essentially Germany's upper house, but considered an independent governing body by the German Constitution — is part of the specific German system of checks and balances between the federal government and the states. The Bundesrat votes on federal government legislation that directly affects the German states' political tasks and tax revenue. Unlike the U.S. Senate, its representatives are not elected directly, and positions are not embodied by individual candidates. Instead, state governments directly participate in the body via representatives, with each state government proportioned a certain number of votes based on its population, but heavily skewed toward the smaller states. Merkel's ruling CDU, however, lost its Bundesrat majority with a loss in the North Rhine-Westphalia elections in May 2010, in part because of the negative voter sentiment surrounding the Greek and wider eurozone bailouts. Merkel is unlikely to pick up any votes in 2011 in any of the seven elections. The CDU's focus, therefore, is on not losing any more votes, which would indicate that the voters have lost faith in the governing parties.

Balancing Between Two Audiences

Throughout the eurozone crisis, Merkel has had to balance between two audiences: the domestic and external. Her external audience consists of investors and fellow eurozone member states. Merkel has tried to reassure this audience that Berlin stands behind the eurozone and that it will not let the euro fail. At the same time, Merkel has tried to reassure the public at home that Berlin is not being overtaxed, that the eurozone is in Germany's interest and worthy of being saved, and that any efforts exerted on helping fellow eurozone members will be followed with painful austerity measures imposed on neighbors and thorough reform of the currency bloc. These two goals have often been contradictory. (click here to view interactive chart) The problem for Merkel — and especially for the somewhat libertarian and thus less historically pro-euro inclined FDP — is that her own fiscally and socially conservative constituency is largely skeptical of Germany's role in supporting the eurozone through the crisis. CDU and FDP voters are generally more skeptical of the eurozone and less willing to see Berlin spend its purse on helping eurozone neighbors than is the German center-left. This tightrope act between domestic and international audiences has caused a number of serious problems. First, Berlin played tough with Greece in the spring of 2010, partly to avoid risking the governing coalition's chances at retaining power in North Rhine-Westphalia. Berlin's hard stance, however, led to market uncertainty and most likely caused the ultimate bailout costs to balloon. Second, in November, Merkel tried to signal to her fiscally conservative constituency that investors, and not just German taxpayers, would be asked to share in the burden of future bailouts — take "haircuts," as Merkel said, or cuts in principal to be retrieved on loans they issued to governments — thus minimizing Berlin's exposure. This definitely contributed to the investor panic that resulted in the Irish crisis and Dublin's ultimate bailout. Most recently, Merkel hoped that Axel Weber — fiscally conservative German Bundesbank president and likely successor to European Central Bank (ECB) President Jean-Claude Trichet — would help her speak to these two audiences. Merkel specifically hoped that Weber's candidacy would reassure her fiscally conservative domestic constituency that Berlin would have an inflation hawk at the head of the ECB, but she also hoped that Weber would ultimately toe Berlin's line of supporting peripheral eurozone member states through accommodating ECB policy. Weber balked at the idea of being Merkel's electoral campaign slogan, especially since he staunchly opposed the ECB's accomodationist policies toward the peripheral states. Weber quit, leaving Merkel without a key campaign plug ahead of the seven state elections. This is not to say that the upcoming German state elections will be all about eurozone bailouts and Berlin's foreign policy. Ultimately, local issues will dominate, but many of these local issues are already being framed in the wider debates about whether Germans want Germany to be a European leader, which comes with its own share of costs and responsibilities. However the elections' importance is interpreted, one thing is clear: They have created a nearly six-month-long electoral challenge to Merkel's rule that requires Berlin to focus on balancing between its internal and external audiences. Germany remains committed to the eurozone and will not deviate from supporting it via bailouts and reform efforts. However, Berlin's rhetoric directed at the domestic audience could very well confuse the markets and precipitate further instability in the eurozone.