Indefatigable Ms Merkel

When Ms Hannelore Kraft, the Social Democrat (SPD) premier of Germany’s largest state North Rhine Westphalia, led her party to a sweeping victory in state elections back in May, observers were quick to draw wider conclusions.

With the SDP clinching 39 per cent of the vote and the Chancellor, Ms Angela Merkel’s Christian Democrats (CDU) putting up its worst ever performance in the state, the results were taken by many as a sign of changing attitudes towards the austerity that has been a central tenet of the central government’s approach to the Euro Zone crisis.

Could Germany too be going the way of France, where Ms Merkel’s staunch ally was thrown out of power in favour of austerity-bashing socialist Mr Francois Hollande?

As many will have guessed, the truth is far too complex for that. Sure, what happens in North Rhine Westphalia is very important. With a population of 18 million, in a country of 81 million, it is home to some of Germany’s most prosperous cities, including Dusseldorf, Cologne and Dortmund.

At the same time, the election had much to do with local politics: Ms Kraft is a hugely popular, charismatic figure, expected to be a force in national politics before long.

By contrast, Mr Norbert Rottgen, the federal environment minister who stood as the CDU’s candidate in the region, ran a half-hearted campaign, reluctant to give up Berlin in favour of local politics.

Approval ratings

Despite the electoral setback, Ms Merkel remains in a surprisingly strong position.

She received a 66 per cent approval rating in a recent poll for television station ARD; this was after the recent European leaders’ summit where she agreed to allow direct aid from the bailout fund to Euro Zone banks, while not buckling on issues such as Eurobonds or her demand for increased central supervision of bailed-out banks.

These were the highest ratings she has had in the two years since the Euro Zone crisis kicked off. In the same poll, 58 per cent said that she had taken the right decisions during the crisis.

A separate poll published this week by Handelsblatt found that 85 per cent of business leaders surveyed supported the central government’s approach to the crisis. Her party continues to lead in the polls.

“People trust her with the handling of the German position in the Euro Zone crisis and they want her to continue to defend the German agenda of structural reform for Europe,” says Mr Carsten Nickel, a Germany expert at the Eurasia Group.

There has been much analysis of what has led Germany to its seemingly intransigent position on austerity — theories range from its experience of hyperinflation to memories of re-unification and massive wealth transfers from west to east. Others have a simpler explanation: “It’s just about who is going to pay, and people are aware that it boils down to the German tax payers,” says Mr Nickel.

“Ms Merkel covers the preference of many Germans, who are committed to the European project for political reasons but are reluctant to pay.”

Conditional solidarity

Germany’s hesitation about taking on further liability is perhaps understandable.

According to Mr Christian Schulz of Berenberg Bank, the German tax payer’s direct exposure through the EFSF, the Euro Zone’s temporary bailout fund, and a 15-billion euro bilateral loan to Greece, totals 70.7 billion euros (rising to 207 billion, should other nations not be able to meet their guarantees).

Germany also has exposure through the European Central Bank’s lending to peripheral banks and its securities market programme of 302 billion euros (rising to 1,121 billion euros if others withdrew).

In the face of such high liability, Ms Merkel’s strategy of “conditional solidarity” — a willingness to increase Germany’s burden and liability but not without certain guarantees on structural reforms and Euro Zone fiscal integration — has proved a popular strategy, argues Mr Carsten Brzeski, economist at ING.

“She tries to be tough, while at the same time slowly preparing the German public for the fact that the Euro Zone or at least part of it will have to move more towards integration.”

The hostility that Ms Merkel faces internationally — media has represented her as everything from a Nazi to the Terminator — has been met with a mixture of bafflement, frustration and anger in Germany.

“Your ATMs continue to give euros, only because of the money we, the Germans, and the other Euro Zone nations have put in.

Yet you still call us Nazis, which we do not find at all funny,” wrote Conservative newspaper Bild in a recent message to Greece.

Economic complexity

Germany’s past makes its commitment to Europe, the political project, extremely strong; this commitment has also been bolstered by the huge global political clout Europe has given it, on everything from nuclear talks to Syria.

“Germans are well aware of the fact that its influence in world politics and the world economy rests on a strong and integrated union,” says Mr Nickel.

But on an economic level the issue is more complex. While Euro Zone membership, and a competitive currency have aided Germany’s rise, so did the tough, far-reaching structural reforms to the welfare system and labour market brought in by the SDP government of Gerhard Schroeder.

The “Agenda 2010” reforms hammered the former “sick man of Europe,” which at the time was still tackling the integration of a vastly divided country, into a lean globally competitive nation.

“People say: we did our homework and we are benefiting from that homework, but we suffered,” says Mr Brzeski.

And while the German economy has begun to feel the impact of the crisis (the latest PMI data pointed to a sharp contraction of the manufacturing sector in June), unemployment remains low.

“People still hardly feel the crisis so you won’t get many voters putting pressure on Ms Merkel to hurry up right now,” adds Brzeski.

As they were the ones who introduced Agenda 2010 it has also been harder for the SDP to maintain a consistently anti-austerity line, in a way that threatens Ms Merkel.

party politics

In fact, much of the domestic pressure falling on Ms Merkel comes from those who believe she has adopted too soft a stance: 172 economists grabbed the headlines with a recent letter railing against the direct recapitalisation of troubled European banks.

And significantly this week, opponents of the already-delayed 500-billion euro permanent bailout fund, the European Stability Mechanism, have managed to stall its implementation: the federal Constitutional Court is taking their claims seriously and is yet to decide on whether or not to grant a temporary injunction until it completes a full assessment of the constitutionality of the laws.

Quite how Ms Merkel will continue to balance domestic pressures, with the increasingly vocal calls for compromise from neighbouring nations, remains to be seen.

What is clear is that Ms Merkel’s ability to withstand can’t be underestimated. Her own position at the helm of the CDU is testament to that.

A childless, divorced, Protestant from Eastern Germany, and a latecomer to politics in a party dominated by socially conservative Catholics from the West, she has proved wrong those who questioned her ability to weather party politics. She’s likely to do the same to those who believe she will now be swayed on her Euro Zone agenda.