Merkel Seen Turning to Euro Bond-Backing SPD to Win in 2013

German Chancellor Angela Merkel may be preparing a rerun of her “grand coalition” with the Social Democrats to secure re-election, an alliance that would pit their backing for euro bonds against her demand that the region embrace austerity to solve the debt crisis.

As Merkel begins a month of campaigning today for two state votes that will set the tone for the 2013 federal election, her Christian Democratic bloc faces an arithmetical hurdle: plunging support for her Free Democratic allies has reduced them to a rump. That may force her to turn to the biggest opposition party, known as the SPD, to keep her job next year.

“The options at the moment are very obvious,” Michael Fuchs, the deputy leader of Merkel’s Christian Democratic Union in parliament and a member of its national steering committee, said in an April 10 interview. “There could be a grand coalition anytime. That’s the most foreseeable one.”

A grand coalition like Merkel’s first-term government of 2005-2009 would bring more pressure on her to do more to hold the 17-nation euro area together. Social Democrats including Merkel’s former finance minister, Peer Steinbrueck, who may lead his party in next year’s campaign, back joint euro-area bonds to tighten the bloc’s integration. Merkel has rejected that path until after the euro area achieves more unity.

FDP Collapse

While a grand coalition would spell tension over bailout politics, polls show Merkel is unlikely be able to govern with her current partner following the ballot due in September or October 2013. After winning a record 14.6 percent in the 2009 election, FDP backing has crumbled as it flirted with an anti- rescue stance, bickered over energy policy and failed to deliver on its core election platform of tax cuts.

The Free Democrats held at 4 percent support in a weekly Emnid poll yesterday, below the 5 percent threshold needed to win seats in parliament. Merkel’s bloc fell one percentage point to 35 percent, after winning 33.8 percent in 2009, while the Social Democrats had 26 percent, up from 23 percent in the last election.

Merkel will attend a rally in the northwestern city of Muenster today, the first of 15 campaign appearances in 25 days. While Schleswig-Holstein votes on May 6, most attention is focused on the May 13 contest in North Rhine-Westphalia. With almost a quarter of Germany’s 82 million people, the state is a bellwether for the parties’ national fortunes.

SPD Policies

With the state campaigns heating up, Merkel is coming under fire from the FDP for backing policies they say are more in line with the SPD. Last month, she agreed to a 6.3 percent pay raise for public-sector workers over FDP opposition. In November, she endorsed a limited form of a minimum wage, both policies that are more in line with SPD thinking.

FDP leader Philipp Roesler, in an interview with Germany’s WAZ newspaper group published April 12, included the CDU in his criticism of parties he said are adopting “Social Democratic unity policies.”

The 57-year-old chancellor is making no commitments to stick by Roesler.

“Every election is an election all unto itself,” she said March 26 in Berlin. “You also can’t compare a federal election four years ago with next year’s. Times change and situations change.”

Saarland Example

At the state level, leaders of Merkel’s party are openly attacking the FDP. The CDU premier of Saarland state, Annegret Kramp-Karrenbauer, ended a coalition that included the FDP in January and blamed the party for “dismantling itself,” according to a Frankfurter Rundschau newspaper interview.

“I’d have done the same thing myself,” Merkel told a rally on March 23 in the Saar city of Dillingen, drawing cheers from about 2,000 CDU supporters.

Kramp-Karrenbauer went on to win the election two days later and is now in talks to set up a grand coalition with the SPD, which placed second. The FDP was ejected from the regional assembly after taking just 1.2 percent.

The rise of the Pirate Party, a group that campaigns for Internet freedom, is eroding the standing of the Green Party and may also spur the SPD to renew an alliance with Merkel. The Pirates had 12 percent support in yesterday’s Emnid poll, their highest rating to date.

The Greens fell one point to 12 percent in the poll, down from as much as 24 percent in May last year. Germany’s six leading pollsters all show an SPD-Greens coalition, like that led by Social Democratic Chancellor Gerhard Schroeder from 1998 to 2005, falling short of a majority.

‘Downward Spiral’

For now, Social Democratic leader Sigmar Gabriel says CDU attacks on the FDP mark an effort to deflect attention from its difficulties.

The Social Democrats see the chancellor’s policy of “eternal rescues” during the debt crisis as bound to fail. “After every decision to tackle the crisis made by heads of government, it flames up somewhere else,” the party says on its Website. “Euro bonds could stop the downward spiral.”

Merkel, Gabriel said in an article for the Frankfurter Allgemeine Zeitung on Dec. 13, is instead intent on turning the issue into a “domestic policy battleground” by characterizing euro bonds as a symbol of a “transfer and debt union.”

Merkel rejects joint debt issuance for now, saying April 3 in Prague that euro bonds would remove an important gauge of competitiveness in the single currency area. Even so, she reiterated her stance that convergence in the euro bloc might, at some point, make them possible.

Higher Taxes

Beyond bailout policies, the SPD differs with Merkel on a demand for higher corporate, property, income and inheritance taxes. Compromise on those issues may be preferable for her to going down in defeat due to FDP vagaries. Konrad Adenauer, Ludwig Erhard, Kurt Kiesinger and Helmut Schmidt all lost the chancellorship in upheavals caused by their FDP allies.

Merkel may have learned the lesson as she turns the FDP from kingmaker to also-ran.

“Merkel grabs everything and takes all the credit,” Ulrich Deupmann, a partner at management adviser Brunswick Group Inc. in Berlin, said by phone. Her current partner “isn’t going to recover before the next election.”

To contact the reporters on this story: Leon Mangasarian in Berlin at lmangasarian@bloomberg.net; Tony Czuczka in Berlin at aczuczka@bloomberg.net.

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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