Merkel the Loser

The Italian election damages the credibility of the Chancellor's euro-crisis strategy.

German chancellor Angela Merkel is possibly the biggest loser in Italy.

Because the election there was so close, questions have emerged about how cooperative Italy will be in the future. Not only does that threaten Merkel’s own combined, European approach to dealing with this crisis; it also makes her more vulnerable to domestic opposition as she approaches her own September election. Her personal popularity will almost surely secure her another term. But she may, as a result of these developments, face new constraints that will force her to consider German interests more narrowly than she has to date. As a consequence, Germany and Europe will lose ground.

German Resistance to Merkel and Europe

Though Merkel is well liked, the average German voter is far from entirely satisfied with her approach. Pollsters record a common concern that Merkel’s cooperation has cost Germany influence within Europe. People were particularly struck, it seems, when last year the Governing Council of the European Central Bank (ECB) simply outvoted German representatives, ignored their concerns about purchases of the sovereign debt issued by Europe’s periphery, and launched into a buying program. More serious is the vague sense within the German public that cooperation with other eurozone members has siphoned off German wealth and income. Since some 84 percent of the German people expect the crisis to get worse, they connect these losses that they believe have already occurred to a frightening and open-ended claim on their taxes, their incomes, and, they have emphasized, their pensions as well.

Few Germans, of course, connect the dots between Merkel’s cooperative approach and these fears, but no one seems to feel a need to do so either. Indeed, the sense of loss and vulnerability is that much more politically potent because it is vague. Data and economic logic would circumscribe the possibilities and render them less troubling.

When it comes to specifics, much of the German opposition seems to have focused for the time on the new arrangements for eurozone-wide bank supervision, particularly the decision to give that responsibility to the European Central Bank (ECB). Up until last June, Merkel had resisted any suggestion to recapitalize banks through the European Stability Mechanism (ESM). She insisted that such relief would have to wait until the eurozone could organize an effective and uniform system of bank supervision. All that played well with the voters.

But at the June European Union (EU) Summit, Merkel bowed to hasty arrangements for the supervisory role to go to the ECB. This did not play well in Germany. On the contrary, much of the public, the pollsters record, saw her gesture as a kind of betrayal. People pointed to her earlier vow to fight any shared liabilities in Europe, the so-called Eurobonds, for “as long as I live.”

Technically, of course, she has not contradicted herself. The Union still has not issued such bonds and has no plans to do so. They were in fact not an item at the June summit. But still, the use of pooled ESM funds for bank recapitalization does impose risk commonly across all eurozone members, much as the bonds would have. If she is technically still true to her word, the voters question the spirit of her actions.

Merkel has tried to square this circle. At a meeting during which she shared the platform with ECB President Mario Draghi, she told Germans that neither she nor the ECB would allow “eurozone-level recapitalization of banks without structural reform.” It seems to have done little to persuade. Noting the feeling at the presentation, at least one German journalist, Klaus Engele of Handelsblatt, characterized Merkel’s June summit concession as “the biggest political blunder of her illustrious career.”

The German financial and political elite seems particularly skeptical of the ECB role. Merkel’s own finance minister, Wolfgang Schäuble, has, more than once, pointed out what he refers to as an “inherent conflict of interest with the Bank’s monetary policy tools.” Peer Steinbrück, former finance minister and a challenger for the chancellor’s office, has gone so far to question the ECB’s ability to shoulder supervisory responsibilities. He points out that there are six thousand banks in Europe, and the ECB has no staff with any supervisory experience. Others in German financial circles have asked what will become of the London-based European Banking Authority when the ECB takes over bank supervision. German banks, for their own narrow purposes, have resisted the ECB in this role, as has Jens Weidmann, head of the Bundesbank, which would clearly lose authority under the new arrangements.

It seems most upsetting to these commentators that the June summiteers, including Chancellor Merkel, ignored the recommendations of the ECB’s own commission on bank supervision. This group, called the Larosière Commission (after its head, former Banque of France governor and managing director at the International Monetary Fund, Jacques de Larosière), warned on several levels against giving bank supervision to the ECB. In addition to all the complaints already voiced in Germany, the commission also worried over a politicization of the ECB, as it tried to maneuver among the different rules of the zone’s seventeen members. It even doubted whether the EU treaty permits the ECB to operate in a supervisory capacity. Though such criticisms take a technical turn, at base they question the wisdom and coherence behind the summit’s and Merkel’s decision. Summarizing that sense, Finance Minister Schäuble concluded dryly that it is hard to endorse a decision that is “anything but thought through.”

What Angela Knows