Leading Two Unions

As chancellor of the eurozone’s leading economy, Angela Merkel has taken on the role of de facto European leader, arguably even more so now than ever since Francois Hollande replaced her close ally Sarkozy as France’s president, and an increasing number of eurozone countries seem to be on the brink of bailout territory. As the German election approaches, conflicts are arising between national and European interests.

The recent Cypriot bailout provided a crucial moment for Merkel, as the deal saw money coming out of the pockets of big savers on the island – the first deal of its kind with conditions demanding contributions from bank deposits, described at the time as an unique case. It had recently been announced that Germany’s economy had shrunk more in the fourth quarter of 2012 than at any time since the peak of the financial crisis in 2009. Awaiting the bailout agreement, Cypriots marched though Nicosia waving Nazi flags and carrying anti-German posters. During the discussions leading to the final rescue package decision, the media debated the implications of the possible outcomes: would Germany finally tire of rescuing the euro?

Elections

With the German federal election scheduled to take place in September, it is clear that the leadership has been trying to focus on German issues. Merkel’s Christian Democratic Union Party (CDU) had already showed signs of concern for its election prospects, having begun to make concessions last year by altering its prior stance on the introduction of a minimum wage in Germany, which has long been a key priority of the opposition Social Democratic Party (SPD).

However, a Forsa poll in early April showed that support for the CDU and FDP coalition was at its highest level since January 2010. The unpopularity of SPD candidate Peer Steinbrück, who caused a stir earlier this year by calling Italian comedian-turned-politician Beppe Grillo and Silvio Berlusconi “clowns”, has been cited as a great advantage for the CDU. With Steinbrück as an alternative, “people have the feeling that they’re in good hands” with Merkel, Forsa chief Manfred Guellner told Stern magazine.

A continuation of the current coalition is by no means guaranteed, however. The newly-formed Alternative für Deutschland (Alternative for Germany’) Party has limped into the race, with a German exit from the euro as their only tangible policy thus far. “Because of the euro, people in southern Europe don’t hesitate to express their disgust toward Germany, using old Nazi comparisons,” said Bernd Lucke, an economics professor and leader of the new party, which advocates national referendums that would give citizens a voice in matters such as economic rescue packages.

Although Alternative for Germany would not seem to pose a great threat to established parties, if its popularity grows, it may manage to succeed in poaching a small number of votes from the FDP, the CDU’s coalition partner which is currently just managing to poll above the five per cent hurdle. In a questionnaire for the German tabloid, Bild , which asked how votes would be cast if the election took place now, ‘Alternative for Germany‘ achieved the five per cent.

Fiscal Union

In turn, the German public have not failed to notice the anti-German sentiment which has been growing in austerity-package nations. Protests in the bailout countries showing citizens carrying anti-German banners emblazoned with swastikas and moustachio’ed caricatures have dredged up old wounds – it has been speculated that it could potentially serve to turn voters against the euro if Germany is required to foot the bill for another bailout, particularly if they are thanked with swastikas.

Germany is, despite the poor statistics for the final quarter of 2012, one of few European countries which has managed to retain its AAA rating. In fact, some economists point out that Germany’s immense economic strength during the recession while other European countries continue to fall is partially thanks to the introduction of the single-currency union.

This stems from the fact that in adopting the euro, Germany replaced its Deutschmark with a much weaker currency, or rather a currency much weaker than the Deutschmark theoretically would have been. This reduced the price of German exports, providing a huge economic boost. This is not to say that Germany owes all of its prosperity to the euro at the expense of the weaker eurozone economies. Deep-seated economic practices, in addition to the financial downturn, account for the respective successes and failures of eurozone countries. But this does mean that an exit from the euro would be costly for Germany as a country which relies heavily on exports.

Länderfinanzausgleich

Supporting financially weaker areas internally is deeply ingrained into the German system, but is nonetheless not met with an all-embracing enthusiasm. The policy of Länderfinanzausgleich is a programme of fiscal adjustment which sees richer German states (Länder) contribute to a fund which is distributed to poorer states. The system was established in 1950 and has been most famously employed from 1995 to integrate the former East German economy into the new united republic. The ‘new states’ of Berlin and Sachsen, formerly part of the German Democratic Republic, are among those currently receiving funding.

Two of the wealthiest states, Hesse and Bavaria, have recently spoken out against the policy. Bavarian governor Horst Seehofer complained last month that his state is forced to pay money to poorer states like Berlin, who use it for things which Bavaria itself cannot afford, a statement echoing the resentment of some Germans for supporting countries like Greece, which has a retirement age of 50, while Germans work until the age of 65. Bavaria and Berlin have a relationship which reflects some of the stereotypes dredged up between Southern and Northern Europe – Berlin is typically seen as a young, creative and frivolous city, whereas Bavarians are viewed as traditional, conservative and quite stuffy.

To some extent this internal conflict can be seen as a microcosm of Germany’s relationship with weaker eurozone countries – particularly in terms of German attitudes to continuing bailouts. Seehofer’s concerns about the effect of pay-outs on his state’s own economy mirror German concerns about the euro; “How can it be that in Germany a debt limit is agreed, but states which are rich themselves are forced into debt in order to afford to pay for fiscal adjustment.”

However, it is interesting to note that Bavaria itself received support through the fiscal adjustment plan until 1993, when it suddenly experienced an agricultural boom.

Merkel’s foothold currently seems steady, but re-election is no certainty. The euro will play a key role in determining Merkel’s popularity, and in turn the threat of further dissatisfaction from her citizens could push Merkel to call for harsher decisions on future bailouts. Continuing resentment towards Germany and more euro rescue missions could nudge German voters towards an anti-euro party. However, Germany remains economically strong and many Germans are pro-European Union, acknowledging that Germany has a role to contribute to supporting weaker member states which it committed to with the introduction of the single currency. Even tabloid newspaper Bild, a publication which does not hesitate to call southern Europeans lazy and condemn the cost of eurozone bailouts to Germany, criticised Alternative for Germany for its lack of an actual euro exit strategy or any alternative vision for Europe’s future.

What is clear is that Merkel will either need to find a way to reconcile the needs of her two unions, or, if the CDU and the demands of German citizens conflict with the developments in the European Union, she may have to make a choice between them.

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