Berlin - A European backlash against austerity could force
Germany to adjust its savings-first approach to the debt crisis, although
political tumult and economic decline will still test the ability of eurozone
leaders to hold their currency bloc together.
The strong performance of Socialist Francois Hollande in the
first round of the French presidential election and the Dutch government's
collapse in a row over budget cuts this week highlight the risks of a rebellion
against Berlin's hardline emphasis on cutting deficits.
Should Hollande beat incumbent Nicolas Sarkozy in a runoff
on May 6 and Chancellor Angela Merkel's conservatives lose an important
regional election a week later, pressure will rise on the German leader to
explore more growth-friendly policies.
However, the options for achieving growth in recession-mired
southern European economies such as Greece are extremely limited, people close
to the German leader concede.
By pushing up French and Dutch bond yields this week,
financial markets have made clear they will punish countries that stray from
the consolidation course, leaving Europe little choice but to grind it out and
hope the bloc's increasingly brittle policy consensus holds.
"No one in Europe has the money for big stimulus
programmes, no one can afford higher deficits," Peter Altmaier,
parliamentary whip for Merkel's Christian Democrats (CDU), told reporters on
"And therefore growth must be achieved via other means
like structural reforms. This is recognised across Europe."
That does not mean Berlin can avoid making some concessions
to political forces across Europe who want a shift in strategy.
Merkel's main political rivals at home, the centre-left
Social Democrats (SPD), are threatening to deny her the two-thirds majority in
parliament she needs to pass the EU's "fiscal compact", a charter
that would set tough budget rules in stone.
Like Hollande, the SPD wants a growth component added to the
pact, and the party is in a strong position to scupper Merkel's plan to ram it
through the Bundestag lower house next month.
Victory in an election in the big German state of North
Rhine-Westphalia on May 13 could embolden the SPD to take a more
confrontational approach with Merkel.
Among the party's demands are a financial markets tax to
fund investment in the eurozone's reeling periphery, more flexible use of
European Union structural funds, so-called project bonds and more lending power
for the European Investment Bank.
Ulrike Guerot, who runs the Berlin office of the European
Council on Foreign Relations, believes that if Hollande defeats Sarkozy next
month and bands together with the SPD, they could force Merkel to adjust her
"If Hollande can get the choreography right, if he can
get a large group of countries behind him and not turn this into an open
confrontation with Merkel, I could imagine a huge dynamic for pro-growth
policies," she said.
Signs that economic gloom elsewhere in Europe is hitting
Germany could also affect Berlin's approach to the crisis.
With Chinese Premier Wen Jiabao visiting a trade fair in
Hanover this week, the focus has been on the German economy's increasing
reliance on China.
But exports to China make up only 7% of Germany's annual
total, compared with 40% to the eurozone, leaving it highly dependent on the
health of its neighbours - particularly France and the Netherlands.
"You could see economic weakness in other parts of the
eurozone begin to drag on Germany," Peter Bofinger, a member of the German
government's "wise men" council of economic advisers, told Reuters.
"It's foolish to pretend that Germany is immune to what happens elsewhere
Trade data have already pointed to a slowdown in German
exports to its eurozone partners. A survey of purchasing managers on Monday
showed the German manufacturing sector shrinking at its fastest pace in nearly
three years, partly because of weak sales to southern Europe.
Merkel, who faces a federal election next year, is unlikely
to give up her trump card - the robust German economy - without a fight.
Greece, Ireland, Netherlands
Still, the lack of workable options for boosting growth in
Europe means the currency bloc is in for a rocky ride.
Perhaps the biggest political hurdle is an election in
Greece on the same day France holds its runoff.
Opinion polls suggest the parties behind the current
technocrat-led government in Athens - the conservative New Democracy and
socialist PASOK - could win enough seats to form a government. However,
coalition talks are likely to be long and difficult regardless of the result.
Fringe parties that have benefited from growing anger with
the government's austerity-for-aid policies could also deliver a surprise,
calling into question Greek support for the cuts mandated under its bailouts.
In Ireland, a referendum on the budget discipline pact
scheduled for May 31 could inject more political uncertainty into crisis resolution
efforts. And a strong showing by eurosceptic Freedom Party leader Geert Wilders
in a snap Dutch election would be a major risk for the bloc.
Notwithstanding recent agreements to boost the financial
firepower of Europe's rescue funds and the International Monetary Fund,
political turmoil could eat away at investors' confidence, increasing risks to
big eurozone economies such as Spain and Italy and rekindling breakup fears.