With political allies weakened or ousted, Chancellor Angela Merkel’s seat at the head of the European table has become much less comfortable, as a reckoning with Germany’s insistence on lock-step austerity appears to have begun.
“The formula is not working, and everyone is now talking about whether austerity is the only solution,” said Jordi Vaquer i Fanés, a political scientist and director of the Barcelona Center for International Affairs in Spain. “Does this mean that Merkel has lost completely? No. But it does mean that the very nature of the debate about the euro-zone crisis is changing.”
A German-inspired austerity regimen agreed to just last month as the long-term solution to Europe’s sovereign debt crisis has come under increasing strain from the growing pressures of slowing economies, gyrating financial markets and a series of electoral setbacks.
Spain officially slipped back into recessionfor the second time in three years on Monday, after following the German remedy of deep retrenchment in public outlays, joining Italy, Belgium, the Netherlands and the Czech Republic. In the Netherlands, Prime Minister Mark Rutte handed his resignation to Queen Beatrix on Monday after his government failed to pass new austerity measures over the weekend.
The political upheaval drove stock markets on the Continent sharply lower, with Germany’s DAX index finishing the day down 3.4 percent. The sell-off in Europe dragged American indexes down around 1 percent. A survey of European purchasing managers showed an unexpected plunge in confidence this month.
The Netherlands, a staunch supporter of the German position, became the latest European country forced into early elections by the European crisis, just one day after the first round of presidential voting in France raised the possibility that the incumbent, Nicolas Sarkozy, would be unseated by his Socialist challenger, François Hollande, in a runoff election.
From trading floors to polling stations to the streets of cities across Europe, the message appears increasingly to be that countries cannot cut their way to fiscal health. They need growth, too. In recent months, powerful voices have joined the chorus, including those of the managing director of the International Monetary Fund , Christine Lagarde, and Italy’s prime minister, Mario Monti. Treasury Secretary Timothy Geithner has called repeatedly for Europe to defer budget cutting in favor of some form of stimulus spending.
Pressured by the presidential campaign, even Sarkozy, once Merkel’s most prominent ally, has begun to talk of the need for growth.
Despite the rising criticism, Berlin did not seem ready to concede defeat for its austerity plan.
“We certainly still have many difficult reforms, measures and times ahead of us,” said Martin Kotthaus, spokesman for the Finance Ministry. “But the path appears to be correct. At least that is what the development of the last weeks and months proves, and also — as far as I can tell — the surveys of the populations of the European Union.”
It was only in March that leaders from 25 of the 27 European Union countries gathered to sign the fiscal compact championed by Merkel. Her plan, combined with $1.3 trillion in cheap loans injected into the banking system by the European Central Bank in December and March, raised hopes that the worst of the crisis had passed.
But those hopes have been dashed as growth has faltered and interest rates on the debt of struggling countries like Spain and Italy have shot up to dangerous levels again.
“If significant numbers of the coalition wobble or fall, then Berlin has a problem,” said Constanze Stelzenmüller, a senior fellow in Berlin with the German Marshall Fund of the United States.
However, while there is a growing consensus on the need for new growth policies, it is far from obvious what those policies should be, particularly for the heavily indebted countries already having trouble selling government debt.
“You have this dilemma because you have to borrow more money to finance growth measures, but that is also likely to stir up the financial markets,” said Tanja Börzel, a professor of European Union politics at the Free University in Berlin. “Then the money you need will be more expensive to borrow.”
The European Central Bank cannot be counted on to deliver major monetary stimulus in the manner of the United States Federal Reservebecause the bank is required by treaty to combat inflationabove all else. One option is to allow debtor countries more time to bring their deficits under control, but that is seen more as damage control than as a way to foster growth.
Another possibility, which Germany will be under renewed pressure to accept, is some form of common European debt, generally referred to as Eurobonds, which any member of the currency zone could tap. It is a step that Merkel’s conservative bloc has opposed forcefully, but with more than 17 million people in the euro zone out of work and the unemploymentrate at 10.8 percent, the need for urgent steps is growing.
Marie Diron, an economic adviser to the consulting firm Ernst & Young, said Germany could slow down its own drive to balance its budget and do more to encourage domestic consumption. Other European states would benefit if Germany bought more of their goods.
“Austerity has to fit into a wider policy context,” Diron said.
Taking advantage of growing voter outrage, fringe parties like the Greek ultranationalist group Golden Dawn and France’s far-right National Front, which won nearly one in five votes Sunday, are gaining strength, evoking comparisons to the Weimar era, which ushered the Nazi Party into power. That has only added urgency to the push for programs that would create jobs.
“You see an incredible public uproar against the strict austerity measures,” Börzel said. “It’s mostly the populist parties that now become ever more critical of the austerity policies.”
Even in Germany, where unemployment is low and the crisis seems a faraway phenomenon, the political landscape has grown unpredictable. The computer hackers of the Pirate Party, which supports internet freedom, have emerged from relative obscurity to challenge the Green Party as the third most powerful faction in opinion polls.
Merkel’s coalition partners, the pro-business Free Democrats, have been the most prominent victims of the political instability. In trying to stave off its total collapse, the party has become a less and less reliable partner, especially when European rescue packages are up for votes in the German Parliament.
“In a nutshell, you need growth and employment or else debt reduction doesn’t work. We’re seeing that right now in Spain,” Sigmar Gabriel, the head of Germany’s opposition Social Democrats, said on German public radio, adding that Merkel’s policies had failed in southern Europe. “The success of Hollande was in sending a signal beyond France that the politics of Merkel and Sarkozy are not without alternatives.”
Over the years of the euro crisis, Merkel has moved on the problems at a deliberate pace, a tactic of brinkmanship meant to achieve debt reduction across the euro zone while limiting German exposure to other countries’ liabilities and, therefore, minimizing political damage at home. So far it has largely worked in Germany, and her support in Europe is broader than it appears, with smaller countries like the Baltics, Finland and Austria — and even the larger and increasing supportive Poland — content to stand quietly behind her.
Merkel has proved herself a masterful tactician time and again. She was adept at working with the Social Democrats as her partner in the previous German government, and Hollande might be even more amenable than Sarkozy to ceding French sovereignty in economic policy in exchange for help on growth, Vaquer from the Barcelona Center for International Affairs said.
“She will have to backtrack on austerity anyway,” Vaquer said. “Germany can now extract a much more unified Europe in terms of economic governance than it ever could have before.”