Europe looks up to Merkel for economic revival

As Angela Merkel savoured the results of Germany’s national elections, newspapers on the left and right in Greece on Monday gave the same mournful assessment of what the result means beyond German borders. “Victory for the Queen of Austerity,” declared the front page of Ta Nea, a center-left daily. “Merkel victory atop the ruins of the South,” said the conservative Dimokratia.

Bloggers, meanwhile, posted a cartoon that showed Merkel, a stethoscope around her neck, wagging her finger at a skeleton slumped in a blue chair and ordering “exercise, exercise, exercise to strengthen your muscles.” For months now, Europe has been waiting for the end of a German election campaign that, while focused almost entirely on domestic issues, stirred furtive hope among those outside Germany that, if re-elected to a third term, Merkel - despite having given no indication - would try a more energetic, and perhaps more economically stimulative, approach to leading Europe out of its extended slump. The waiting has now ended - and so, too, has any hint of a new approach.

Instead of a respite from years of grinding budget cuts and tax increases in return for bailout funds, Merkel’s conservative Christian Democrats campaigned on holding the line against expensive commitments to reviving Germany’s neighbours. Her financial aides claimed that signs that Europe’s long recession had recently become less severe had proved that its austerity policies were working.

Merkel’s electoral success - the Christian Democrats and their allies, the Christian Social Union in Bavaria, together won 41.5 per cent of the popular vote - will bring “more of the same,” predicted Mats Persson, director of Open Europe, a London-based research group focused on reform of the European Union. For countries now on economic life-support, this would mean yet more painful “exercise,” which in Greece has slimmed job prospects so significantly that over 60 per cent of youth are now unemployed.

Whatever coalition government emerges in Berlin from what could be weeks of haggling, Persson said, “there may be a little change of rhetoric, but the substance will remain the same. There will be a continued focus on austerity.”

Merkel said as much herself during a final day of campaigning on Saturday. “We have to continue on this course,” she told an election rally in Berlin, denouncing the European policies of her main rival, Peer Steinbrück, who had called for a new, and presumably mostly German-financed, Marshall Plan to relieve what he called “a deadly dose of austerity.” Still, some outside Germany held out hope that a coalition with Steinbrück and his Social Democrats could moderate Merkel’s approach.

“We should not forget that Merkel needs a partner,” said Hannes Swoboda of Austria, president of the Socialists and Democrats, a grouping of left-leaning forces in the European Parliament in Brussels. “Now is the time to get a more flexible policy. She could not be flexible before the election for fear of losing votes to the Alternative for Germany,” he said, referring to an upstart protest party that, campaigning on promises to scrap the euro and stop using German money to bail out Europe’s economic laggards, nearly crossed the 5 per cent hurdle to enter Parliament.

Merkel’s centre-left opponents tried during the campaign to rally support for the idea of so-called eurobonds, which would effectively pool the debts of the 17 countries that use the euro. But even Swoboda says the new flexibility he expects from Merkel will not go that far. “This is not on the agenda,” he said. “Maybe in three or four years.”

The idea of pooling obligations was raised at the start of Europe’s rolling debt crisis in 2009 and gained support from some economists. But, in a measure of Germany’s outsize role in decision-making in Brussels, it got nowhere once Merkel made clear that she opposed it.

Further request

Asked about the possibility of Greece receiving yet more funds, Merkel said on German television immediately after Sunday’s election that her finance minister, Wolfgang Schäuble, was already committed to examining a further request and that would almost certainly lead to a third bailout deal for Athens. Schäuble also appeared on television Sunday night, assuring Germany’s European partners that Berlin would play a ‘reliable’ role in the continent’s affairs.

For much of Europe, particularly in countries that balk at what they see as efforts by Berlin to recreate European economies in its own image, Merkel inspires a mix of anxiety and grudging respect. Italy’s La Repubblica newspaper on Monday called her the “tranquil and fierce czarina that bewitched Germany.” The French newspaper Le Monde declared her “Chancellor of Germany, Chief of Europe.”

With nearly a third of the eurozone’s economic output and the lowest unemployment rate after Austria - 5.3 percent in July compared with 27.6 percent in Greece and 26.3 in Spain, according to Eurostat, Europe’s statistical agency - Germany is Europe’s undisputed economic powerhouse, and also its paymaster.

But having already contributed hundreds of billions of dollars to bailout funds for Greece, Ireland and others, Berlin is in no mood to relax its insistence that countries asking for help must undertake labour market and other reforms and also accept the tough discipline of “fiscal consolidation,” economist-speak for austerity. Ifo Institute, an economic research institute in Munich, estimates that Germany has paid out nearly $600 billion, and has total bailout liabilities of $868 billion.

Even before the election, it was clear that, barring a major upset, Berlin would stick to policies that Schäuble, in a commentary in The Financial Times, recently declared a great success. “The world should rejoice at the positive economic signals the eurozone is sending almost continuously,” Schäuble wrote.

Officials in Brussels, the headquarters of the European Union, say they mostly agree with Schäuble’s upbeat analysis, though some questioned his “triumphalist” tone. The European Commission has in recent months slowed the pace of austerity, relaxing budget targets for a number of countries and stressing labor and other reforms as well as just cuts. But it insists it is sticking to its basic policy of forcing financial discipline. “For Europe, recovery is within sight,” José Manuel Barroso, the president of the union’s executive arm, the European Commission, said this month.

Indeed, Europe has shown some faint flickering of a recovery, with the nations of the European Union recording overall growth of 0.4 percent in the second quarter, an anemic rate but still better than the previous six quarters of contraction.

Greece, meanwhile, is stuck in its sixth straight year of recession, but this has not stopped Prime Minister Antonis Samaras from declaring that “Greece is turning the page,” as he put it this month, when the national statistics agency reported that the Greek economy shrank by “only” 3.8 percent in the second quarter, less than the expected 4.6 percent. It was the smallest contraction since Greek secured the first of two bailout packages from the troika of creditors - the European Commission, the European Central Bank and the International Monetary Fund.

Greece, Samaras said, can expect to return to its pre-crisis levels of prosperity by 2020. A big question now is whether Greece will need a third bailout after warnings from the monetary fund that Athens, despite belt-tightening, faces a funding shortfall of nearly $15 billion.