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Will Germany be able to hold the Eurozone together?

Marcus Walsh-Führing / May 2020

Photo: Shutterstock

 

Since the coronavirus crisis, Chancellor Angela Merkel’s public opinion polls have surged which has led to a change in her political trajectory. Merkel’s handling of the crisis has placed confidence in the Chancellor’s own Christian Democratic Union (CDU) which has seen a 40 percent surge and 12-point rise from the middle of March. The surge in the polling is a result of the government’s ability to control the impact of the crisis and hold the policy position of fiscal austerity at all cost despite the pressure of Southern Europe.

At the same time, a budgetary surplus in Germany has allowed for a stimulus package and has given the domestic economy a short reprieve from the haemorrhaging from financial markets. The government’s stimulus package and balance sheets have created the same political divide between Northern and Southern Europe as in the 2008 financial crisis. On the European level, this has placed European Union (EU) solidarity in jeopardy and has created a political stalemate in finding a policy solution for the Eurozone.

Domestically, this has placed wind in the sails of the Merkel administration giving her and her supporters one more chance to reestablish the legacy for Europe that has been set forth by a party with a 15-year political record. The question remains whether the conservative political strategy, proven to be effective in the past, will be able to overcome the political divide in the Eurozone under the current circumstances. In these times, the political crisis seems more volatile.

As the Southern European economies are deteriorating due to the effects of the coronavirus crisis, Germany’s austerity measures will not be effective as they were during the 2008 crisis. This crisis will have more painful effects on Southern European countries and their periphery. The shutdown from the crisis will cost Italy trillions of euros in the coming months. As of right now, its debt is at €2.5 trillion or about 138 percent of its GDP. This gives the Italian government little room for economic manoeuvrability. This is one such example of many, and when adding the debt of the GDP ratio of Spain and France, the numbers are even direr.

In comparison, Germany’s debt to GDP ratio is just above 60 percent of its GDP. Germany’s monetary policies have allowed German politicians and finance ministers to “scapegoat” Southern European governments’ high levels of debt ratio to GDP which is not in line with Maastricht Treaty stipulations. The German government has tried to stay as close as possible to the rules of the Treaty without allowing any interpretation which has given finance ministers little room to create flexible monetary policy.

German politicians conveniently forget that the EU originates from the European Coal and Steel Community (ECSC) created after World War II and as such has always been a political rather than an economic union. The union was created with a common security policy and as a protection from another world war. The reaction from Northern European Countries, especially Germany, towards the protection of Southern European countries in the current crisis reflects the playbook of the 2008 financial crisis, the remnants of which are still present today and challenge solidarity within the EU.

The promotion of European solidarity has never been an easy political sale for local constituents. However, without a strong response from the European Central Bank (ECB) and the European Investment Bank (EIB), the economic fallout from the coronavirus crisis will be worse than that of the 2008 financial crisis. As the leader of Europe, Germany has to convince Northern European countries, such as Finland and the Netherlands, to adopt a pro-stimulus policy for the protection of the political union that is at the basis of the Eurozone.

For the EU to address the crisis, the German government is revisiting the European Stability Mechanism (ESM) which is designed as a sovereign bailout fund for the Eurozone and can grant credit to governments in need of liquidity. While there are many options on the table, the ESM provides the necessary tools to address the crisis. These tools will allow the EU to inject stimulus into the Eurozone to reassure the markets and to make sure that populist factions do not coop the European project for their own political agenda.

It has been Chancellor Angela Merkel’s concern that she and her party have not been living up to her mentor Chancellor Helmut Kohl’s promise to curb populism. As of right now, the populist Alternative for Germany (AfD) is here to stay as the largest opposition party. While Merkel has created a political lifeline in her handling the coronavirus crisis and is, for now, defying the populist movement, the question is whether she will be able to persevere.

 

Marcus Walsh-Führing

Marcus Walsh-Führing

May 2020

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