Merkel’s isolation among G-8 on economic policy reflects sentiment in Germany
By Michael Birnbaum,
BERLIN — The world leaders who urged German Chancellor Angela Merkel this past weekend to back down from her unforgiving approach to Europe’s economic problems have something in common: They don’t answer to German voters.
Amid increasingly raucous pushback on German-advocated austerity, Merkel appeared isolated at Camp David discussions about Europe’s rising unemployment and continued economic pain. But she is being faithful to public sentiment in Germany, where unemployment is at its lowest in decades and her hard-line policies remain popular amid belief that excessive European debt triggered the crisis.
In particular, more Germans than ever are ready to say goodbye to Greece as a common partner in the euro currency. A Greek departure would exacerbate the troubles of other vulnerable countries and create head winds for the slow U.S. recovery, an anxious prospect for President Obama in this election year.
Merkel is walking an increasingly tricky tightrope to connect German domestic priorities and international ones. Though she has been making quiet concessions to leaders who favor stimulus over cuts, she has opposed grander proposals to prop up struggling countries, measures that will be under discussion Wednesday at an emergency meeting of the euro zone’s leaders.
The biggest proposal — for euro bonds, which would allow countries that use the euro to borrow money with the backing of all 17 member countries — has been pushed by French President Francois Hollande as a major step toward bringing investor confidence back to countries such as Spain and Italy. On Monday, Merkel’s allies dismissed it.
Euro bonds would be “a prescription at the wrong time with the wrong side effects,” deputy finance minister Steffen Kampeter told Deutschlandfunk radio.
France has advanced a very different message.
“Europe needs to send signals to increase investment and growth in Greece while the country experiences a severe recession,” French Finance Minister Pierre Moscovici told reporters in Berlin on Monday after meeting with his German counterpart, Wolfgang Schaeuble.
On smaller issues, however, Germany’s approach has been friendlier to its neighbors. Berlin has taken action in recent weeks to ease the burden on recession-troubled European countries in ways that fly under the radar of the German electorate, which has been dealing losses to Merkel’s Christian Democratic Union in recent state elections.
One major boost came hours after Merkel and Obama shared an uncomfortable embrace at Camp David. Germany’s largest trade union and an employers group announced Saturday that they had reached an agreement to give a 4.3 percent pay raise to Germany’s 3.6 million metal workers.
The step, taken by the private sector but quietly embraced by German policymakers, sets the stage for more pay increases across Europe’s largest economy. And it marks a major departure after a decade in which German wages have remained flat, making ordinary Germans fearful of inflation and unwilling to spend money that could give a boost to other countries.
The move is stimulus by another name — but one that comes from the pockets of Germany’s prosperous industries, not from government coffers. The pay raises will make the country’s exports more expensive to produce, thus helping countries such as Spain and Greece that are trying to push down their salaries to become more competitive.
“Merkel is caught. She can accept little things, but she cannot voice that she accepts them,” said Ulrike Guerot, the head of the Berlin office of the European Council on Foreign Relations, a think tank. “Perhaps she would love to do it, but German public opinion is not ready for the U-turn.”
In a vote last week that Merkel called a “bitter, painful defeat,” her Christian Democrats lost a regional election in North Rhine-Westphalia by a historically large margin to the opposition Social Democrats, a possible future coalition partner that is more supportive of larger steps to stoke growth.
The win by the Social Democrats, however, was in part a reflection of local politics, and Merkel remains personally popular even as her party faces new challenges. Analysts say that the defeat is unlikely to fundamentally alter Merkel’s basic approach, because the Social Democrats are also cautious about quick moves on measures such as euro bonds, though it might make her more open to smaller measures.
Even before the elections, Merkel and her allies signaled support for several other policies that could loosen constraints on growth. They include boosting the lending power of the European Investment Bank, which would help support small- and medium-size businesses inside the euro zone; freeing unused European Union funds for infrastructure projects in struggling countries; and a somewhat higher inflation rate for Germany, which would make it easier for other countries to be more competitive.
But no one change would give Europe the sweeping tools to guarantee that countries won’t go bankrupt or to fuel quick economic growth. Germans worry that major government initiatives would cost too much and could take the pressure off countries such as Greece to overhaul economies along more sustainable lines. Big proposals such as euro bonds will be on the table Wednesday, endorsed by Hollande, Italian Prime Minister Mario Monti, British Prime Minister David Cameron and many European Union officials. But because of Germany’s opposition, their prospects are uncertain.
“We can hope only that the small things are enough,” Guerot said. “The problem is that we are facing a situation that can just get out of control.”
Merkel will meet with opposition leaders Thursday to push for swift approval of the fiscal pact that commits euro-zone countries to tight controls on borrowing and spending.
For now, she is likely to stick to policies that make her the odd one out in clubby gatherings such as the Group of 8 meeting, where not even the outcome of the Champions soccer league final — Britain’s Chelsea beat Bayern Munich in a shootout — went her way.