Forget Nicolas Sarkozy. Ignore Gordon Brown. Angela Merkel, taking advantage of Germany’s economic heft, is now the European Union’s dominant figure. And leaders from Warsaw to Washington had best not forget it.
Just as the German chancellor vetoed a bailout for eastern Europe on March 1, she is now leading European opposition to US President Barack Obama’s call for a global pump-priming package. She’ll determine the fate of a ¤5 billion-($6.4 billion) infrastructure proposal at an EU summit in Brussels later this week.
“It’s Merkel who holds the key to the cashbox, and she doesn’t want to give it up,” says Jean-Dominique Giuliani, chairman of the Robert Schuman Foundation, a research center in Paris.
Merkel’s rejection of more stimulus touched off the first trans-Atlantic clash of the Obama administration and led critics to say she risks deepening the global recession.
Even as finance ministers from the Group of 20 nations were meeting in southern England March 14, seeking to paper over differences with a pledge to deliver a “sustained effort” to boost growth, Merkel was 42 miles (67 kilometers) away in London, defending her opposition to further spending.
“Germany really has contributed its share,” said Merkel, as she stood alongside Brown, the UK prime minister.
The remarks were her third rebuff in three days to Obama’s March 11 call for “concerted action around the globe to jump- start the economy,” comments echoed by Lawrence Summers, his top economic adviser, and Treasury Secretary Timothy Geithner.
It is a reversion to type for Germany, which built its postwar society on the principle of monetary stability after the economic havoc of two world wars. Germany authored the limits on budget deficits for countries using the euro currency -- only to flout them during the reign of Merkel’s Social Democratic predecessor, Gerhard Schroeder.
With the world economy set to shrink for the first time since World War II, Merkel has forged a European position not to go beyond tax cuts and emergency spending that the EU says amounts to 3.3 percent of gross domestic product.
Nobel laureate economist Paul Krugman says Merkel is underestimating the scope of the crisis. Germany is a “giant stumbling block” to global efforts to fight the recession, he told Der Stern magazine last week.
Obama on March 14 said there isn’t a fundamental “conflict or contradiction between the positions of the G-20 countries” on how to deal with the crisis, only “a difference in details.”
Doing Its Share
Merkel’s defenders point to International Monetary Fund data that show Germany spending 2 percent of GDP to fight the recession in 2010, edging out the U.S.’s planned 1.8 percent. U.S. spending of 2 percent this year will top Germany’s 1.5 percent.
Germany has enacted two special spending packages since late last year, including 100 billion euros to boost company liquidity and 82 billion euros in measures including a premium for people who scrap old cars in order to buy new, energy- efficient vehicles.
While the EU forecasts that the German economy will shrink 2.3 percent in 2009 -- the second-worst in the 16-nation euro region, after Ireland -- economists say its relative strength will likely re-emerge whenever the recession ebbs. Europe’s largest economy has used the 10-year-old euro to rebuild its competitiveness, and the EU’s eastward expansion in 2004 moved Germany from the edge of the European market to the center.
The Anchor
“Germany is the only anchor, and everyone wants to grab it,” says Peter Becker, an EU expert at the German Institute for International and Security Affairs in Berlin. “And the Germans say: ‘Please don’t everybody hold onto us, otherwise we won’t make it either.’”
From 2000 to 2008, German labor productivity grew at an annual average of 1.1 percent, the third-fastest rate among the 11 countries that founded the euro in 1999, according to the Conference Board, a New York-based research group. In Italy, by contrast, output per hour shrank at an annual average of 0.1 percent.
While the euro now locks in Germany’s terms of trade in a $12 trillion market, saving exporters from shocks like the deutsche mark’s 68 percent surge against the Italian lira from September 1992 to April 1995, the EU’s enlargement has shored up German markets in the east.
An 18 percent jump in eastern European sales contributed to a 30 percent profit increase at Volkswagen AG’s Audi luxury division last year. SMT Scharf AG, maker of 45 percent of the world’s mining railways, expanded its workforce in eastern Europe after Poland became its top export market.
Eastern Exports
German exports to the EU’s 10 eastern states totaled 116 billion euros in 2008, surpassing exports of 72 billion euros to the U.S., a country with three times the population of eastern Europe.
“German dominance of the economic situation and the scene in the European Union is even greater than ever because of this colossal competitive advantage that they now have,” says Peter Ludlow, a historian and author of “The Making of the New Europe.”
A child of communist-era East Germany, Merkel has made common cause with eastern Europe. She has bridged the continental divide in a way alien to France’s President Sarkozy, 54, who last month fumed that it “isn’t justified” for carmakers Renault SA and PSA Peugeot Citroen to create jobs in the Czech Republic instead of at home.
Sarkozy’s slap at eastern Europe and initial plan to tie aid to French carmakers to domestic job-protection pledges squandered some of the EU-wide credibility he had banked during his first stint in the bloc’s six-month presidency last year.
Sarkozy’s Moment
The French leader’s accomplishments included negotiating a ceasefire in the August war between Russia and Georgia, marshaling the EU’s emergency response to the banking crisis in October and persuading the Irish government to hold a second referendum on a new EU governing treaty that Irish voters shot down last June.
The EU moment for Britain’s Brown was even briefer. His 50 billion-pound ($69 billion) bailout of U.K. banks on Oct. 8 came as the U.S. was still debating buying up toxic assets and before continental European leaders grasped the depth of the crisis. It prompted Krugman to wonder whether the U.K. leader had “saved the world financial system.”
Brown’s Struggle
Five months later, and 15 months before the deadline for the next election, Brown, 58, is battling to save himself politically. With unemployment at a 10-year high of 6.3 percent and the EU predicting a full-year economic slump of 2.8 percent, only 28 percent of Britons trust Brown’s Labour Party to steer the economy, compared with 35 percent for David Cameron’s opposition Conservatives, according to a ComRes Ltd. poll for the Independent newspaper on March 2.
“In October, he was seen as the only leader who was able to take the bull by the horns,” says Philip Whyte, a senior research fellow at the Centre for European Reform in London. “It turns out that his recapitalization of banks is insufficient and the second stage of the downturn is worse than expected.”
The same quirks of the electoral cycle could yet haunt Merkel, who is up for a second term on Sept. 27. Her Christian Democrats plumbed a two-year low in an Infratest dimap poll released March 6, with 32 percent; still, she remains in front of the Social Democrats, led by Foreign Minister Frank-Walter Steinmeier, by 5 points.
“Merkel is definitely a woman to watch,” says Robert Leonardi, senior lecturer in European politics at the London School of Economics. While Sarkozy may be more flamboyant, he says, “she’s emerging more and more as a strong leader” of Europe.
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