Five More Years? Merkel’s Election Pledge Key for Europe
With three months to go before Germans go to the polls, Chancellor Angela Merkel put her cards on the table on Monday, maintaining her tough stance on austerity for debt-ridden euro zone nations in an election manifesto that could be at the center of EU policy for the next five years.
"Against the background of the different (parties') election manifestos, the election results could have an impact on Germany's euro crisis management," Carsten Brzeski, senior economist at ING said.
According to Brzeski, a continuation of Merkel's government would lead to status-quo when it comes to fighting the euro zone crisis. Merkel has blocked the creation of Eurobonds and under her Germany has resisted further burden sharing and financial integration of the euro zone.
If however, the election leads to a mixed result with a grand coalition of the CDU and the opposition center-left SPD, there could be a somewhat stronger push towards more integration, particularly on the banking union, but not necessarily on further burden sharing, Brzeski said.
(Read More: Europe Unable to Break Impasse on Who Pays When Banks Fail)
But if the opposition were to win and a coalition of the SPD and the Greens would come to power, Germany could be ready to take a "quantum leap" with a fully-fledged banking union, possibly even with a common deposit insurance scheme, a debt redemption fund and some form of Eurobonds, Brzeski said.
The document put forward by Merkel's center-right CDU/CSU party on Monday outlines a series of generous family-friendly policies for Germans, described by some as a lurch to the left to attract as many voters as possible.
It includes measures which are in sharp contrast to the fiscal reforms Merkel has insisted other euro zone countries undertake. Among them are a rise in child benefits, provisions for flexible working hours, plans for more affordable housing, rent control as well as fresh spending on infrastructure and pensions. German newspaper Handelsblatt said the measures would cost as much as 28.5 billion euros.
"The CDU/CSU is by far and away in the lead and when you're in the lead you can act like a sailor who's winning the race. You just look at the boat behind you; when they go right you go right, when they go left, you go left. You'll stay ahead of them," Irwin Collier, professor of economics at the Freie Universitaet Berlin told CNBC.
The latest opinion polls show that Merkel's CDU/CSU would get 40 percent of the vote while the Free Democrats – the party's preferred coalition partners – would get 6 percent. If Germans were to elect their Chancellor directly, Merkel would win 58 percent of the vote, leaving her main contender, the social democrat candidate Peer Steinbrueck far behind with only 15 percent. Support for Steinbrueck's SPD party stood at 22 percent while the Greens had 18 percent of the vote.
(Read More: Why Odds Are Stacked Against Strong Euro)
Merkel has come under fire for the high price tag associated with the measures outlined in the election manifesto, but insists that they will not place new burdens on the taxpayer or the economy. Instead, she argues that more freedom will increase the chances of higher tax revenue.
"One of the very optimistic assumptions in this platform is that economic growth will be strong enough so that there will be additional tax revenue to finance everything. If that really will happen, that's something we'll have to see," Collier said.
Germany's economy seems to be bouncing back from weak demand as the global economy recovers slowly. The influential Ifo index of German business sentiment released on Monday showed German business morale edged up in June, data which may bolster Merkel's Christian Democrat CDU/CSU party further.
"The German economy seems to cruise along nice and steady, defying any growth concerns," Brzeski said. "Looking ahead, the main risks for the German economy come from the outside, not from the inside."
'Founding Mother'?
Those risks include further turmoil in the euro zone. For German taxpayers, a series of bailouts for heavily-indebted euro zone countries since 2009 have been increasingly difficult to stomach. The country, regarded as the engine of the European economy, is heavily dependent on exports to the rest of the euro zone and wants its partners to get their finances in order and return to growth as soon as possible.
"Would a third term in office tempt Angela Merkel to speed up euro zone integration, possibly giving herself a place in the history books as the 'founding mother' of the federal states of the euro zone? Or could the emergence of the new anti-euro party, the 'Alternative for Germany', actually lead to a more nationalistic, selfish approach, eventually leading to a break-up of the euro zone?" Brzeski asked.
Merkel has consistently argued that this can only be achieved by reining in public spending – a view which has put her at odds with some of her peers who argue that the harsh austerity measures are stifling growth.
Steinbrueck, a former German finance minister, has voiced support for the idea of Eurobonds which Merkel has consistently opposed. She argues that jointly-guaranteed debt, which French President Francois Hollande also supports in order to reduce borrowing costs for struggling nations, would be counterproductive.
(Read More: Austerity Only Way to Regain Investors' Trust: Merkel)
"This would pave the way for a European debt union, in which German taxpayers would face unlimited responsibility for the debt of other countries. We refuse this," Merkel's manifesto said.
Brzeski said Eurobonds are only explicitly mentioned by the Greens, but the SPD does not exclude burden sharing and explicitly proposed "project bonds" to finance common European projects.
Merkel has also stood firm on the issue of how to share the cost of bank collapses in the EU. The latest round of talks over banking union collapsed on Saturday morning when Germany and France disagreed on the extent to which countries can impose losses on bondholders or large savers, a so-called "bail-in."
The manifesto underlined the importance of a Franco-German partnership, perhaps hinting at the difficulties Merkel has encountered in working with Hollande. Her views were embraced by former French president Nicolas Sarkozy – the duo were dubbed 'Merkozy' - but relations with France have been somewhat more strained since his socialist successor took the reins.
Steinbrueck has accused Merkel of slowing down progress in forming an EU-wide banking union and has voiced support for Hollande's anti-austerity stance.
"It's not a done deal by a long shot…the serious politicking is going to be unfolding in the months to come...It's an interesting race. It'll go down to the wire," Collier said.