Europe may be a non-issue in the German election campaign, but it’s becoming increasingly clear that Europe will occupy a chief role in the agenda of Germany’s next chancellor, perhaps more so than exclusively German domestic issues.
Though center-right chancellor Angela Merkel and center-left challenger Peer Steinbrück are both stridently pro-Europe, it’s an open question how to next German government should deal with the poster-child of the European financial crisis — Greece. To understand Germany’s options requires an understanding of the underlying Greek politics — and how a Greek political crisis could plunge the entire eurozone back into panic mode.
Even as Germany and the eurozone as a whole pulls out of the worst of the most recent recession, Greece continues to struggle with economic contraction. The economy is set to shrink by between 4.5% to 5% this year, the unemployment rate is a staggering 27.6%, and this follows five consecutive years of recession capped off by a 7.1% contraction in 2011 and 6.4% contraction last year. Greece remains trapped in a grueling internal devaluation where the private sector is being forced to accept leaner wages to make exports more competitive and the public sector is being forcibly downsized by the terms of the bailout programs agreed to by the ‘troika’ of the European Central Bank, the European Commission and the International Monetary Fund. Greece today is not a fun place to live, and Greek voters are angry at Germany in particular for forcing so many Greeks into poverty and joblessness while doing little in terms of fiscal or monetary policy to boost the country’s medium-term growth prospects.
But German voters have their own narrative — while they’re still generally supportive of ever close union within Europe, they’re nonetheless wary of the European Union becoming a transfer union where wealth from German productivity flows to Greek profligacy. That underlies the collective angst within the entire Germany political community late last month when Wolfgang Schäuble, Germany’s finance minister, indicated that Greece would require a third bailout — perhaps up to €11 billion, which is still a fraction of what the troika has already lent to Greece. (For the record, Portugal’s government is also likely to require a second bailout of its own early next summer.)
Back in Greece, that means a politically radioactive set of negotiations at a time when Greece’s government is reeling. A coalition between the two once-dominant parties since the return of Greek democracy in 1974, the center-right New Democracy (Νέα Δημοκρατία) and the center-left PASOK (Panhellenic Socialist Movement – Πανελλήνιο Σοσιαλιστικό Κίνημα) holds just a cumulative 155 seats, giving it the barest of majorities in Greece’s 300-member Hellenic Parliament. After the disastrous shutdown of Greece’s public television station ERT in June, the anti-austerity Democratic Left (Δημοκρατική Αριστερά) left the governing coalition — its leader Fotis Kouvelis previously agreed to join the coalition after Greek’s June 2012 elections in order to provide more stability for the country.
Snap elections seem likely in any event sometime next year. If elections were held today, SYRIZA (the Coalition of the Radical Left — Συνασπισμός Ριζοσπαστικής Αριστεράς) seems likeliest to win them, according to a recent poll, making the young, massively anti-austerity opposition leader Alexis Tsipras Greece’s radical new prime minister. The Sept. 11 Public Issue poll showed SYRIZA moving into first place with 29%, New Democracy with 28%, and the far-right, neo-fascist Golden Dawn (Χρυσή Αυγή) would win 13%. PASOK, meanwhile, would fall to just 7%, the Greek Communist Party (KKE) would win 6.5%, the right-wing, anti-bailout Independent Greeks would win 5.5%, and the Democratic Left would win just 2.5%, less than the 3% threshold for entering parliament.
SYRIZA has essentially consolidated much of the support of the anti-austerity left, so it’s puzzling how PASOK still attracts even 7% support, given that it’s subjugated itself almost completely to prime minister Antonis Samaras’s agenda. But Golden Dawn’s support is rising, and it’s likely to pull support from increasingly frustrated right-wing voters that once supported New Democracy, suggesting that if economic conditions keep deteriorating, Golden Dawn could draw even more support to a largely xenophobic, nationalist agenda.
If those numbers held up in a new Greek election, Merkel and her colleagues in Paris, Brussels and other European capitals, would probably regard it as a disaster for Europe.
Tsipras, in particular, has been demanding all year long that the next German government allow for a ‘haircut’ of Greek debt — in essence, this would mean debt forgiveness of some of the €239 billion already loaned or likely to be loaned through the first two bailouts to keep the Greek treasury afloat. But that outcome now seems outlandishly unlikely as Merkel’s chances for winning reelection have remained steady — or even increased — since the beginning of 2013.
If Merkel is forced to join a grand coalition with the center-left Sozialdemokratische Partei Deutschlands (SPD, Social Democratic Party), Greece could find some leniency on the terms of any future bailout and perhaps a relaxation of current bailout terms, but debt forgiveness? Not likely.
In their one televised debate, Steinbrück criticized Merkel for applying austerity in ‘deadly doses’ to Greece, hinting that he would focus on boosting growth and reducing unemployment throughout Greece and Europe’s struggling peripheral economies, citing the generosity and foresight of the United States in deploying postwar aid through the Marshall Plan. Merkel snapped back that it was under center-left chancellor Gerhard Schröder that Greece was permitted to join the eurozone, and that her job as chancellor is to maintain reform pressure on Greece.
Increasingly eurosceptical voices within Merkel’s own center-right Christlich Demokratische Union Deutschlands (CDU, Christian Democratic Party) and its Bavarian sister party, the Christlich-Soziale Union in Bayern (CSU, the Christian Social Union) mean that Merkel may even be forced to take a harsher line with Greece if Merkel’s current broad center-right coalition wins enough seats to continue for another term.
The likeliest path? Germany’s next government — whether a continuation of the current coalition, a ‘grand coalition’ or even a ‘black-green’ coalition with the Greens — and Greece’s government will likely want to move fast to plug the shortfall with a new bailout. Samaras, in particular, will want to negotiate the terms of the bailout with as little controversy as possible.
Though Merkel (presumably having won a third term as chancellor) will be free from an immediate verdict by her electorate, she’ll still balk at handing over more than €10 million without further reforms. But neither Merkel nor Samaras will want to negotiate a deal so stringent that it could cause the government to fall, possibly handing power to SYRIZA and Tsipras, so there’s a self-imposed limit on the reforms Merkel will demand and Samaras can reasonably accept. If Tsipras wins power, the space between him and Merkel will be so wide that Greece could find itself in real jeopardy of being forced out of the eurozone five years into a grueling reform, austerity and adjustment program.
If there were valid arguments for the Greeks to leave the eurozone in 2009 or 2010 and return to a more easily devalued drachma, those arguments are still valid — but it would be hard for even the most stone-faced Greek economist to shrug off the past four years of grinding internal adjustment as a sunk cost.