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Bailed-Out Nations Get Another Four Years of Merkel

German Chancellor Angela Merkel
German Chancellor Angela Merkel, party leader of the Christian Democratic Union, smiles before her speech at the CDU headquarters after the German federal elections results were announced in Berlin, on Sept. 22, 2013. Photographer: Krisztian Bocsi/Bloomberg

Sept. 23 (Bloomberg) -- Southern Europeans are facing four more years of Angela Merkel whether they like it or not.

Majorities of 82 percent in Spain, 65 percent in Portugal and 58 percent in Italy repudiate the German leader’s handling of the euro area’s debt crisis, blaming her for drastic cuts in social services, recession and record unemployment, according to a German Marshall Fund poll released last week.

The majority that matters, in Germany, decided otherwise yesterday, putting Merkel back in charge and saluting policies that have kept the currency union intact while at times veering close to letting it unravel. Any concessions now are likely to come on the margins: a little more money for Greece here, a little less austerity there, without altering her determination at most to drip-feed aid to countries that embrace tight budgets, wage restraint and export-oriented industry.

“Crisis management is very much a continuation of the status quo,” said Mujtaba Rahman, a former European Commission official who is now director of European analysis at the Eurasia Group in New York. “The core German principles of legal certainty and conditionality will remain in place. Decision-making will still be incremental.”

Merkel, 59, will start her third term with Europe perched between crisis and recovery. The 17-nation euro zone is emerging from a record 18-month recession and Ireland is poised to become the first of five aid-dependent countries to be weaned off outside help.

Bond Spreads

While Ireland’s 10-year bonds now yield about 2 percentage points more than German debt, making it the first aid recipient to fall in line with euro interest-rate targets, progress has been spottier elsewhere. Greece, with a yield premium of about 8 percentage points, needs further relief; Portugal, with a 5.2 percentage-point premium, might also need a top-up.

Germany’s 28 percent weight in the $12.7 trillion euro-area economy, top credit rating and pre-eminent role in the creation of the euro enabled it to dominate the crisis response. German views may gain more clout, now that two crisis-management allies -- the Netherlands and Finland -- face fiscal and economic problems of their own.

“For our European policy orientation, nothing will change,” Merkel told reporters in Berlin today after meeting her party’s top officials.

Coalition Building

Merkel wouldn’t speculate on the shape of her next government, most likely a rerun of her 2005-2009 coalition with the Social Democrats, her party’s traditional rivals. The Christian Democratic bloc won 311 seats in the Bundestag, five short of an absolute majority, forcing Merkel to share power with the Social Democrats or Greens.

“The German SPD is much more in sync with other countries, also in the south,” said Laurens Jan Brinkhorst, a former Dutch deputy prime minister who now teaches at the University of Leiden.

Defections from her own ranks have already compelled her to enlist the Social Democrats as crisis-management partners. On at least four occasions, including this year’s aid package for Cyprus, Merkel relied on opposition votes to pass save-the-euro measures in the Bundestag.

“She has been able very successfully to occupy the middle ground,” said Kemal Dervis, a former Turkish economics minister who is now a vice president of the Brookings Institution in Washington. Merkel the consensus-seeker ruled out trying to form a minority government.

‘Initial Contact’

Merkel said today that she had “initial contact” with the SPD leadership, which will make up its mind about a possible coalition on Sept. 27. Defeated SPD candidate Peer Steinbrueck said there would be nothing “automatic” about another power-sharing deal with the Christian Democratic bloc.

Merkel also didn’t rule out talking to the Greens. Efforts to form a government will run in parallel with euro-level negotiations over bailout fixes, next year’s national budgets and backstops for troubled banks.

Merkel-SPD talks lasting as long as the 65 days in 2005 would give time for markets to be unsettled by risks including political tumult in Italy or German high-court objections to the European Central Bank’s bond-buying program, the key element in over a year of market calm.

Merkel’s Legacy

One school of thought holds that Merkel, in her third term, will turn to legacy-building by dispensing aid more liberally and shouldering more of the costs of forging a closer euro union.

Merkel is animated by “a sense of destiny in terms of what her third term can leave behind in the legacy of the EU,” said Jackson Janes, head of the American Institute for Contemporary German Studies at Johns Hopkins University in Washington. “That’s where she’s going to put her marbles.”

So far, destiny’s verdict is mixed. Merkel, who grew up on the wrong side of the Cold War east-west divide, is grappling with a north-south one that was at least temporarily deepened by her austerity-first prescriptions.

The 5.3 percent unemployment rate in Germany that smoothed her re-election contrasts with a euro-zone average of 12.1 percent. Joblessness is 16.5 percent in Portugal, 26.3 percent in Spain and 27.6 percent in Greece, where the debt crisis broke out just as Merkel started her second term in late 2009.

Athens Inspection

As Germans voted, top officials from the troika of European Commission, ECB and International Monetary Fund were heading to Greece to map out the next steps in the rescue package for the country that drove the euro zone to the brink of breakup.

Greece is drawing on 240 billion euros ($324 billion) of pledged aid and needs more, either in the form of fresh loans, a writedown of existing ones, or both. Prime Minister Antonis Samaras said he will hold creditors to a commitment to “consider further measures and assistance” once Greece posts a surplus on its operating budget.

As that date draws closer, the Greek and German sides are replaying familiar arguments over conditionality. In Brussels last week, Samaras said Greece doesn’t need to make further budget cuts. Merkel’s acolytes accused Greece of a something-for-nothing mentality.

“There would definitely be no new program without conditions,” Michael Meister, deputy parliamentary chairman of Merkel’s party in the outgoing government, said in a pre-election interview.

Merkel has ruled out a shift to joint debt liability, saying that would take Europe backward by providing artificially cheap financing to countries that don’t deserve it. She favors keeping governments in charge of euro policies and limiting the powers of the Brussels-based commission, especially on bank oversight.

Cyprus Plea

One country appealing for a more lenient German stance is Cyprus, which was forced by creditors to raze its debt-laden banking system in exchange for a 10 billion-euro bailout in March. The Cypriot economy will shrink 8.7 percent this year, the commission forecasts.

“Germans too realize through the policy of more Europe, more unification, that there is a need for measures not just of austerity, or harsh austerity, but measures to boost growth,” Cypriot President Nicos Anastasiades said in a Sept. 17 interview in Nicosia.

To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net

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

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