Merkel’s Re-election

Angela Merkel faces a 2013 re-election bid. Polls taken in her country show that as many as 70% of citizens do not favor a bailout of Greece or any other eurozone nations. Several of her political opponents have suggested that Greece leave the euro so that bailout funds can remain largely untapped. Now she has to choose a course that may pit her political future against a larger investment in EU bailout facilities.

Merkel has, for the time being, created a firewall around her own re-election prospects because she has turned down a larger Germany contribution to EU bailout facilities. Despite pressure from G20 nations, she has argued that the current facilities, which total 500 billion euros, are enough. That is true, she argues, if the region’s weakest nations will adopt severe austerity measures. She and her finance minister, Wolfgang Schäuble, have pressed this point repeatedly. They do not accept the school of thought that austerity creates an environment for recession.

Merke and Schäuble have decided to focus on austerity to balance the German budget. This, in turn, can be a lesson to the rest of the region. Der Speigel reports that:

The 2013 budget, currently being prepared at the Finance Ministry, will include many billions in savings. In addition, the last stage of the so-called debt brake — Germany’s constitutionally anchored law regulating state borrowing — will be brought forward by two years instead of going into effect as planned in 2016.

Merkel will have to risk that her theory about austerity will work in her own country. That is, the austerity will not push Germany into recession, which would prove her approach is deeply flawed. And the success of the move also could be undermined by a deep recession in the rest of the region, which would hurt Germany’s export income. The rising price of crude could derail consumer and business spending.

There is a reasonable chance now that Merkel will reject a larger investment in the eurozone bailout facilities. Whatever her private belief about this course of action is, she probably will make a decision that will keep her in her job over one that might help build a sovereign debt firewall in the region.

Douglas A. McIntyre