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Why the Euro Zone Crisis is Over…Until September

Monday, 21 Jan 2013 | 5:17 AM ET
Maremagnum | Photographer's Choice | Getty Images

Europe's economies and markets have nothing to fear from the defeat of Chancellor Angela Merkel's party in German regional elections this weekend as the euro zone crisis will be on hold until Germany's national elections in September, analysts told CNBC on Monday.

"You simply should not read too much into this for the federal election. We've still got eight months to go… I still think Angela Merkel is still going to be Chancellor of Germany in twelve months' time, " Alastair Newton, senior political analyst at Nomura said on CNBC Europe's "Squawk Box".

On Sunday, Merkel's conservative coalition lost regional elections in Lower Saxony, one of the country's most populous states. The narrow one-seat victory for the center-left Social Democrats (SPD) and Greens in one of the country's bellwether states has revived the opposition's hopes for defeating Merkel in September's national election.

Merkel's Christian Democratic Union (CDU) has now lost its majority in the upper house of the German parliament, the Bundesrat, which could make it harder for Merkel to introduce policies in the federal parliament without compromising with opposition parties, Newton told CNBC.

So far, Merkel's euro zone policy decisions have only been constrained by public opinion and Germany's constitutional court, which rejected calls in September to block the European permanent bailout fund called the European Stability Mechanism (ESM), but imposed conditions on Germany's contribution to the fund.

(Read More: German Court approves Bailout Fund, With Conditions)

"What this says to me is that she [Merkel] is going to go even more slowly on anything policy-wise to try and fix the euro zone crisis, even slower than she's going already," Newton said on Monday. "As far as the politicians are concerned, as opposed to the ECB, I think addressing the euro zone crisis is on hold until after the German elections in September."

Merkel is still ahead in national polls, enjoying 65 percent support, according to German polling agency, Forschungsgruppe Wahlen. Support has remained strong as voters have endorsed her handling of the euro zone debt crisis and Greece's bailout. Merkel is hoping to secure a third term as leader in September.

"Headlines are going to be quite excitable today and markets are going to take it apart, but my bottom line is to put it aside, and let's get through the next 8 months until the federal elections," Newton said.

The Next Eight Months

In early trading on Monday, the German Dax was up 34 points at 7,736, showing that the election result hadn't worried investors. But Germany's economic performance has been shaky of late, with gross domestic product (GDP) shrinking by 0.5 percent in the last quarter of 2012, according to the country's Federal Statistics Office.

Professor Paul de Grauwe, a leading scholar of European political economy at the London School of Economics (LSE), told CNBC that the economy's performance has been lackluster because Merkel had pursued a balanced budget policy in order to lower debt.

In Germany Debt Is Equal to Guilt: Professor
Professor Paul de Grauwe, holder of the John Paulson Chair at the London School of Economics and Silvia Wadhwa discuss the deeper reasons behind the German dislike of debt.

A slowdown for Europe's largest economy and the euro zone's paymaster, is something the region can ill-afford.

"Economically, when you compare [Germany and Chancellor Merkel] to other countries she is doing well, but it's still a poor performance. The German economy has been growing negatively at the end of last year and it doesn't look like it's going to grow very fast in the coming months, so in terms of economic performance it's not that good," de Grauwe, who holds the prestigious John Paulson Chair at the LSE, told CNBC.

(Read More: German Economy Slows Sharply as Crisis Hits Home)

"One would expect a country (like) Germany to do better. There has been too much focus on trying to balance the budget when the whole of the euro zone is going into a recession. [Germany] shouldn't have done it now," de Grauwe added, saying that if Germany's economy doesn't recover as elections loom, Merkel could be forced to change tact to stimulate growth and consumer spending.

"By September then it might become a problem. If it doesn't grow, I can see Merkel swallowing her pride about balancing the budget and trying to stimulate the economy again."

Contact Europe: Economy

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