Trying to Shake Merkel Loose on Austerity

The tide of approval of austerity measures as the way to solve Europe’s sovereign debt crisis has waxed and waned for the better part of the past year. Germany, the major proponent of expense cuts among financially weak nations as the best means to balance their budgets, has had its way. Austerity has been the primary tool governments in need of bailouts must use to get German support. Germany’s primary leverage has been simple. As the largest and most healthy economy in the region, its insistence has been unchallenged. It is still the de facto bank of Europe. Germany’s philosophy, championed by Chancellor Angela Merkel, has come under pressure again this week as more of the region has fallen into recession and probably will need stimulus funds. Merkel will not be swayed. She is up for reelection soon, and she has watched the fate of her sometime ally — French president Nicolas Sarkozy, who is about to loss his job.

Sarkozy’s sin, in the minds of many French citizens, is that he pushed austerity too hard, particularly at home. He held his ground, perhaps thinking that the electorate would see the wisdom of government cost controls as a way to help France financially and to keep its important premier position with credit rating agencies. Voters do not care about either, based on the election results.

The reasons leaders want Merkel to reverse her course are very few. Increasingly, the International Monetary Fund and leaders of large nations, which include the United States, have argued that Europe will need some level of stimulus to avoid a deep and multiyear recession. These proponents of stimulus point particularly to Spain as unemployment there has risen past 23% and it has announced two quarters of GDP contraction. Spain, without aid, stimulus advocates argue, will need a bailout of hundreds of billions of euros.

The IMF has raised what it says is $430 billion. EU finance ministers claim they have commitments for as much as $1 trillion for bailout aid. But the IMF and European Union know that, without German support, it will be hard to press the two funds into the service of stimulus. Germany can effectively hold fast on its insistence on austerity because of its position as the keystone of the region’s finances.

Whatever Merkel believes privately about the value of stimulus, she will stick with austerity to keep her job.

Douglas A. McIntyre