Austerity Backlash A Chink in Merkel's Armor

The victory of the radical left in Greece is viewed by critics as a rebuke to German’s euro policy. With populist forces on the rise across Europe, some governments may now try to push back harder against Berlin.
Syriza's triumph is bad news for Berlin.

Germany is having a bad couple of weeks.

First the European Central Bank went ahead with its quantitative easing program, ignoring the qualms of Germany’s Bundesbank.

Then, the leftist Syriza won the Greek elections, largely swept into power by its firm rejection of German-dictated austerity.

"Our victory is also a victory for all European peoples fighting against austerity that is destroying our common European future," new Greek prime minister, Alexis Tsipras, told supporters after his party topped the polls on Sunday.

It’s a direct challenge to Germany, which at the height of the euro crisis, was widely regarded as calling the shots in Europe.

The worry in Berlin is that it could start to lose influence over a whole range of governments, from Paris to Rome and Madrid, which under pressure from populist challengers may now start to backslide on reforms Germany considers essential.

At the same time, sources say the German government fears that giving in to Syriza could embolden other anti-austerity movements across the 19-nation currency bloc. "Mr. Tsipras shouldn't get anything his predecessor didn't get," said one government source, who declined to be named.

In 2012, Berlin was powerful enough to impose its fixation on fiscal probity by pushing through a treaty that imposed a budgetary straight jacket on Europe.

Chancellor Angela Merkel’s unassailable position of strength within Europe also allowed her to firmly reject the call from many of her partners for Eurobonds -- the potential pooling of euro zone debt.

But after the Greek vote, Germany is beginning to look more isolated.

While a bloc of mainly northern European countries, including Finland, the Baltics and Austria, back Berlin’s firm austerity line, countries such as Italy and France may be emboldened by the Greek voter backlash.

Italy’s foreign minister, Paolo Gentiloni, a member of Prime Minister Matteo Renzi’s center-left Democratic Party, has already indicated that the Greek election results could open the way for a less rigid approach.

"There has been a tug of war for months between austerity and flexibility," he told an Italian television channel.

Mr. Renzi is facing Italy’s own group of radical populists, the Five Star Movement, led by activist and comedian Beppe Grillo.

However, it was not only the left, but parties from across the Italian political spectrum that greeted the Syriza victory.

Nuccio Altieri, a member of parliament for center-right Forza Italia said: “For me it is like an asteroid that has hit Merkel’s Europe in the heart. It is a Europe that at the moment only creates recession.”

It is like an asteroid that has hit Merkel’s Europe in the heart. Nuccio Altieri, Forza Italia member of parliament

Many in Germany argue that its economic policy prescriptions for the euro zone have been a success.

They point to Portugal and Ireland successfully exiting their bailout programs, imposed in exchange for loans by the lender troika of the European Union, European Central Bank and the International Monetary Fund.

Spain and even Greece are also starting to recover after six years of slumping performance.

However, with radical anti-austerity and euro-skeptic parties gaining across the currency bloc, one legacy of Germany’s austerity drive could be political instability.

“What we are seeing now is that the economic crisis is transforming more and more into a political crisis,” said Sebastian Dullien, a senior policy fellow with the European Council on Foreign Relations in Berlin.

According to Mr. Dullien, the German approach to the crisis has been deeply flawed.

“If you say it’s a success because the euro is still here, well then it’s a success, but the policy has clearly been a failure,” Mr. Dullien said. “We still have very high unemployment in Europe. Many countries will probably have a lost decade.”

 

Quelle: dpa
Supporters see the election of Greece's Syriza as a direct rebuke of the German chancellor.
(Source: dpa)

 

In Spain, unemployment is still stubbornly high, at 23.7 percent. Only Greece has more people out of work in the euro zone.

And youth unemployment is twice that.

The fury over the human costs of austerity has fueled Podemos, a new left-wing movement in Spain with strong ties to Syriza.

Podemos, only one year old, is now the most popular political party in Spain. The country will hold national elections at the end of the year.

“The wind of democracy that is blowing in Greece is called Syriza, in Spain it’s called Podemos,” Podemos party leader Pablo Iglesias told a rally in Athens last week. “Hope is coming.”

In response to the Greek elections, Spain’s ruling Popular Party is dampening expectations that Podemos could follow in Syriza’s steps later this year. “Spain isn’t Greece,” a party spokesman Rafael Hernando told Spanish new channel, La Sexta. “I know a lot of people want to make comparisons. I insist you can’t extrapolate.”

Ireland, often presented as a poster child for stoically enduring and emerging from austerity, could also face political upheaval.

While the country has seen a return to growth and lower unemployment, there is still simmering resentment at the impact of austerity among Irish voters who think the country paid too much to rescue its failed banks. The euro member country goes to the polls in early 2016, and the anti-austerity Sinn Féin party, along with smaller left-wing groups and independents, are gaining in popularity.

In France, the ruling Parti Socialiste of President Francois Hollande is also fighting euro-skeptic forces, which could draw strength from the Greek elections. Syriza’s victory has been celebrated by the far-right Front National, headed by Marie Le Pen, and the hard-left Parti de Gauche. But Mr. Hollande may try to reassert himself within Europe by leading European opposition to Germany’s austerity drive.

Mr. Hollande's failure to make good on his election promise to renegotiate the Europe Union's 2012 budget-cutting agreement, known as the fiscal treaty or compact, was one of the main reasons for his slide in popularity. However, his strong performance after the terror attacks in France earlier this month has boosted his popularity. He may now feel more emboldened to take a firmer stance within Europe.

Mr. Dullien argues that Berlin and Brussels have already implicitly recognized the political impact of austerity, which has seen them easing the strict austerity rules for France, whose economy has stagnated.

“France has been given quite a bit of leeway and additional time. I think everyone in Berlin agrees that you would rather have a France with 4 percent deficit than a France with Marie Le Pen.”

German policymakers also point out that there has already been a reevaluation of European policy.

“The E.U. Commission under (President Jean-Claude) Juncker is putting the emphasis on growth, investment and social cohesion, but without backing off the need for structural reforms. Consolidation also remains important – nobody can simply conjure money out of thin air,” said Michael Roth, deputy minister for European affairs in the German foreign ministry, told Handelsblatt.

In Greece, Germany faces a dilemma. If it relents to Syriza’s demands for debt forgiveness, it could encourage other countries to back populist movements in the hopes of getting similar treatment.

But if Germany plays hard-ball with Greece, it may push the country out of the euro, which could destabilize the currency and rebound on Germany.

"If Greece leaves, the markets will at once suspect that other countries might leave,” said Mr. Dullien. “And that might trigger capital outflows.”

That may be a price worth paying, argued Matthias Kullas, who leads the economic department of the conservative Center for European Policy in southern Germany. He predicted that Germany and the euro zone will stick to its guns when it comes to Greece's calls for a debt writedown. "In the end, the euro governments will remain tough," he told Handelsblatt Global Edition.

At the same time, he suggested there was some space for easing some of the burden on Germany’s struggling neighbors. He pointed to efforts to extend the maturities of Greece’s loans, and said that even in other European countries the “pace” of drastic public spending cuts could be eased slightly. But he warned against going too far.

“If you accommodate Syriza too much, you play right into the hands of other radical parties in Europe,” he said. “A message has to be sent: If you want to remain in the euro, you must carry out the necessary reforms.”

 

Siobhán Dowling is an editor with Handelsblatt Global Edition and has reported from Berlin on the euro crisis since its onset, and has also covered its impact on Greece, Ireland, Italy and France.  Christopher Cermak has covered the euro zone debt crisis from Frankfurt and Berlin. He writes about finance and economic policy for the Handelsblatt Global Edition. Handelsblatt reporters Ruth Berschens in Brussels and Jan Hildebrand in Berlin also contributed to this report. To contact the authors: dowling@handelsblatt.com, cermak@handelsblatt.com

 

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