Merkel keeps everyone guessing

In the biggest challenge of her six-and-a-half years in office, German chancellor Angela Merkel walks a fine line between appearing to be a soft touch, and displaying a lack of commitment to the maintenance of the eurozone, writes Kyran Fitzgerald

COULD the eurozone be about to break apart as money flees the Greek banking system and the storm clouds begin to burst over Spain?

Share values have been tumbling while in the bond markets, a flight to quality is taking place.

The strain on Europe’s periphery is growing. Irish bond yields have risen again and Finance Minister Michael Noonan has conceded a second bailout could now be on the cards.

More than ever, it seems, Europe’s ultimate economic powerhouse and paymaster, Germany, finds itself in the spotlight. Analysts are hanging on every word that issues from Berlin. The country’s normally reticent leader, Angela Merkel, is keeping everyone guessing.

US president Barack Obama, British prime minister David Cameron, and French prime minister Jean Marc Ayault have been pressing Berlin to act to head off the threat of a collapse in confidence which could pitch us back into the dangerzone we found ourselves in after the Lehman Brothers collapse.

Ayault has been scathing about the failure of the EU to help Greece through its crisis. German voters, however, have a different perspective. They view Greece as a bottomless pit.

Merkel has been walking a fine line between appearing to be a soft touch, and displaying a lack of commitment to the maintenance, intact, of the eurozone.

She faces pressures from a voting public experiencing compassion fatigue and from key sections of the elite which draws heavily on an economic philosophy called ordoliberalism.

This philosophy ordains that government should only intervene to ensure that the free market functions efficiently.

Ordo liberals have no time for Keynesian-style interventions aimed at easing the effects of the economic cycle. They have definite views on the need to curb inflation and are well represented amid the ranks of economists, jurists and central bankers.

Across Germany, the Bundesbank is held in near awe. There is still great nostalgia among older Germans for the pre-euro era when the central bank acted as guardian of a strong national currency.

The German members on the board of the ECB are usually monetarist hawks, arguing against moves to reduce interest rates, or engage in intervention in the money markets.

Their influence in the ECB has been very strong at times. The chancellor’s own economic mindset has much in common with that of Margaret Thatcher, even if their personalities are quite different.

The daughter of a Lutheran pastor, Merkel grew up in East Germany. She remained the wrong side of the Berlin Wall into its fall at the end of 1989.

Her entry into politics and rise through the ranks was rapid. She was a government minister within months of German unification. CDU chancellor Helmut Kohl emerged as her great patron.

In 1999, she wielded the knife against Kohl, writing a front page article calling for his resignation following revelations of illegal payments into party funds by business interests.

Kohl had taken a huge financial gamble to nail down unification, pitching Germany into years of accession as the burden of incorporating East Germany grew more onerous.

Taking over as leader, Merkel pressed for deregulation and free market policies, only to discover this turned off the voters. An expected landslide in 2005 turned into a contest which Merkel won only narrowly. She then governed in coalition with the main centre left party, the SPD, until 2009 when her party, the CDU-CSU went into coalition with the Free Democrat party.

Merkel has come under huge pressure since the onset of the Greek crisis, caught between a domestic public deeply sceptical about bailing out a country seen to have cooked the books, and a growing number of people abroad aghast at the huge social and financial cost being exacted by the meltdown.

The pressure on Berlin to seize the initiative by federalising national sovereign and banking debt markets has been immense.

The German Christian Democrats, in particular, have long argued that each state and national society should assume responsibility for its own debts, but a succession of enforced EU/IMF bailouts has undermined this stance.

THE Fiscal Treaty is, in effect, Berlin’s price for agreement to fiscal union and a gradual assumption by surplus countries of the debts of struggling EU states.

Critics warn that the treaty will impose additional austerity, but this appears to be the cover Merkel needs at home as she guides her nation into ever deeper involvement with the rest of Europe. Many German industrialists fret about the threat to exports from austerity and the ongoing implosion in demand in the eurozone.

While debt reduction is now accepted as a goal, the means of its likely achievement is disputed.

French president François Hollande’s ideas are viewed as being very close to those being propounded by the SPD. Its leadership believes an EU-wide growth pact is vital if the continent is to dig itself out of its financial hole. The SPD is calling for a pan-European program to combat unemployment and for a Europe-wide transaction tax, along with EU-wide bank supervision.

It would pump billions into fresh infrastructure projects such as a North Sea wind farm grid. It supports the socialisation of euro debts. This would represent a move in the direction of euro Keynesianism.

Merkel is gambling the house on Europe’s financial system being able to withstand the contagion that would result from a Greek departure from the eurozone. The gamble is a calculated one.

The Greek leftists in Syriza, currently ahead in the polls, argue that Greece holds the trump card, given the huge scale of its debts.

They are preparing to tear up commitments entered into by the predecessor government if they gain power. The official position is that Berlin would prefer the Greeks to remain in the eurozone — the unofficial position is rather different.

Factfile Angela Merkel

* Born: 1954. Hamburg. Moved as an infant to east Germany. Grew up in rural area north of Berlin.

* Education: PhD. Physics, Leipzig university. A talented linguist, forced to turn to study of science after she refused to join the Communist Party.

* Career: Chemist — Academy of Sciences. 1990: Minister of Women and Youth, German Federal Government.

2000 to-date : Leader, CDU (Christian Democrat Party).

2005 to-date: Chancellor, Germany.

* Family: First marriage — Ulrich Merkel; second marriage — Johann Sauer. No children.

* Leisure: Opera and hiking.

* Residence: Modest apartment, Berlin.

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