Germany is likely to continue with the same cautious, pragmatic approach in overcoming the crisis, despite the Southern Eurozone countries’ expectations of changing the policies.
The decisive day, 22 September 2013, not for the German people only but also for the Eurozone citizens, arrived. As pre-election public polls indicated, Christian Democrats (CDU) has received the most votes at 41.5%, whilst the Social Democrats (SPD) and the far-left Die Linke followed with 25.7% and 8.6% respectively.
But Merkel’s coalition partners, the liberals (FDP, have not received enough votes to retain seats in the Bundestag. Angela Merkel may have been a clear winner, but she is without a majority, as her party is short just five seats in the Bundestag. Instead, she is negotiating a formation of a grand coalition with the SPD.
Germany seems to have approved Merkel’s tactics, pace and the policies designed to overcome the Eurozone crisis, a trend the Southern countries hoped would change following the elections. All eyes have been on Berlin, with high expectations of reduced austerity, focus on growth strategy, foster domestic demand, provide decisive leadership, deeper integration, banking and transfer union.
These hopes have been crushed by observers who have argued that current policies will not be reversed regardless of whom is in the next government, as the German public does not share the same wishes. Besides that, the German Constitutional Court in Karlsruhe, which was established to prevent making rash decisions, will make it hard for Germany to alter the Eurozone fiscal architecture and press for swift EU banking union.
The European Commission’s proposal on the banking union, with the European Central Bank as a supervisor, is not a straightforward idea for Germany because it requires transfer of power from Berlin to supranational authorities in Brussels. The European Commission has hinted that it would be prepared to make small compromises, for example, place small banks under national supervision and responsibility. An alternative to such a union could be a separate body without Brussels’ deeper institutional involvement and increased power. Additionally, Germany has resisted direct bank recapitalisation by the European Stability Mechanism.
Transfer unions are also a no-go area for many Germans and the Constitutional Court declared it illegal. The German Constitution would need to be changed, if the Eurozone were to move to a transfer union, which would require a referendum. Any further write-downs could affect German taxpayers directly by taking loses, resulting in popular unrest. In light of this, further write-downs on Greece’s debt are to be excluded as 75% of Greek debt—currently reaching 180% GDP—is backed by Eurozone public institutions.
Instead, insisting on austerity, spending cuts and labour market reforms in the troubled Eurozone countries will continue. Should the SPD form a grand coalition with the CDU, there may be sympathy for the people in the struggling countries, however, the SPD will not change the policy course. Germany has undertaken reforms and restrained wages, which has allowed the biggest EU economy to reap benefits. The German public believes inthe current policies as the reforms have steered the nation’s economy through the economic crisis.
Unsurprisingly, further bailouts of Greece or Portugal are likely. German Finance Minister, Wolfgang Schäuble, has conceded that Greece will need a third bailout, which, according to the SPD, could amount to €77 billion in the next three years, as its bailout package expires in March 2014.
Questions regarding Ireland, Portugal and Cyprus will be raised when their bailout programmes run out in 2013, 2014 and 2016 respectively. Both Ireland and Portugal might need further bailout or a credit line to support their move back to the financial markets, as officials doubt a full recovery is possible. Portugal suffers from high borrowing costs following near government collapse in July 2013, and Ireland struggles with deficit of 7.5% GDP and debt amounting to 123% GDP. Furthermore, Slovenia will also continue to experience German pressure to implement reforms, privatise enterprises in state ownership, and cut the budget deficit in order to avoid a potential bailout. And of course, Italy and Spain will not disappear from the list of the monitored countries either.
Merkel has been praised for clear and pragmatic thinking, but criticised for being cautious and slow, pursuing German national interests, abusing the debt laden countries, as well as lacking strategic thinking and a vision for the Eurozone during the election campaign.
However, the focus in a domestic debate in Germany is elsewhere. As in any elections, the Germans were preoccupied with internal concerns, ranging from demographics, income disparities, pensions to energy transition, rather than the Eurozone.
Politically, Germany has acted as an equal international player in the Franco-German tandem since WWII instead of pursuing external ambitions and providing strong and decisive leadership, thereby creating a vacuum in the crisis. However, Germany will pick up the check should a disaster occur. Therefore, it will continue to act as a model for its partners and export its policies to the other members of the single currency bloc by force, with attached conditions.