German Chancellor Angela Merkel (right) talks with then German vice-chancellor Sigmar Gabriel during a debate ahead of a vote on a third bailout for debt-mired Greece at the German lower house of parliament in Berlin in August 2015. Photo: AFP
Opinion
Macroscope
by David Brown
Macroscope
by David Brown
As Angela Merkel prepares to bow out, who will hold the euro zone together?
With growing discord over wealth disparities, hostility towards Brussels over the bungled Covid-19 vaccine roll-out and populist tendencies bubbling under the surface, there is a palpable sense of political divisions opening up again
As German Chancellor Angela Merkel prepares to step aside after 16 years in office, Germany, Europe and the world are entering a new, more uncertain phase – one that will be significantly shaped by her legacy. But which one will it be?
Arguably Merkel came to the euro’s rescue in the wake of the 2008 crash and the European debt crisis. But she leaves office with Europe looking less united, facing economic uncertainties and showing greater rigidity towards the outside world.
With Europe’s political future looking less assured and Germany’s controlling grip on European policymaking slipping, Merkel’s departure from the political stage after the German federal elections in September will resonate across the markets. Europe’s single currency faces some serious tests ahead, and there will be potential reserve management headaches for large euro investors, especially China.
Merkel is a hard act to follow. She should always be remembered as the saviour of Europe’s economy and the euro for masterminding the bailout during the European sovereign debt crisis in 2010.
Initially reluctant to spend Germany’s hard-won riches on the affected peripheral euro zone member states of Greece, Ireland, Portugal and Spain, Merkel was finally spurred into action when she realised the extent of counterparty exposure by Germany’s banks to a mass credit default in Europe. If Europe’s financial system went down, then it would drag Germany down with it.
Christine Lagarde (left), then managing director of the International Monetary Fund, and Euclid Tsakalotos, then Greece’s finance minister, talk at the start of a special Euro group finance ministers’ meeting on the Greek crisis, at the European Council headquarters in Brussels, Belgium, on July 12, 2015. Euro zone finance ministers had set the day as the deadline to reach an agreement to save Greece from bankruptcy, amid warnings that failure to strike a deal by then could lead the country to crash out of the zone. Photo: EPA
Without Merkel galvanising joint rescue with the European Union and the European Central Bank, history would have been a lot different. For this, the world owes Merkel a big debt of gratitude.
But Germany, on Merkel’s encouragement, was too quick to impose fiscal austerity on Europe to help clear up the budgetary mess in the aftermath. The subsequent fiscal squeeze left the euro zone budget deficit dropping from 6.3 per cent of gross domestic product at the height of the crisis in 2010, down to 0.5 per cent by the end of 2018.
The belt-tightening left Europe’s economy badly equipped to deal with fallout from the Covid-19 pandemic when it struck in 2020.
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European economic growth and job creation had struggled for years under the yoke of German-driven fiscal austerity. And the ECB ended up as the swing producer for super-stimulus, leaving former ECB chief Mario Draghi to assure the world in 2012 that it would do “whatever it takes” on monetary policy to end the crisis and save the euro. It subsequently left European interest stuck in negative territory for years and little in reserve.
Europe’s economy now looks like it is springing back to health, with gross domestic product expected to grow by 4.3 per cent this year, according to Organisation for Economic Cooperation and Development forecasts. But appearances can be misleading, with the economy bouncing back thanks to base effects, after output collapsed 6.7 per cent in 2020 and with activity catching up for lost time during the recession.
In the 11 years leading up to the pandemic, average GDP growth for the euro zone was as low as 0.9 per cent largely due to the impact of German-driven fiscal austerity. At a time when the ECB should be switching back towards tougher monetary policy in the next few years, it is hard to envisage future economic growth coming anywhere close to this year’s expected 4.3 per cent forecast without a major relaxation in fiscal policy.
Sources: Eurostat, European Commission
While the race intensifies in Germany to find Merkel’s successor, the most important issue is who fills the political void on the wider European stage. With growing discord over wide wealth disparities within Europe, strong hostility towards Brussels over the bungled Covid-19 inoculation roll-out and populist tendencies still bubbling under the surface, there is a palpable sense of political divisions opening up again.
At this critical point in the global recovery cycle, the last thing the world needs is a more introspective, fractious and increasingly protectionist Europe.
This is the moment Europe needs to build better bridges with the US and China and ease the trade frictions which gathered pace under former US president Donald Trump. President Joe Biden holds out hope for change, but Europe and China also need to join forces on the road to global recovery.
The euro is not out of the woods. If the European recovery falters, forcing the ECB to languish behind the Federal Reserve on interest rate tightening, the euro will suffer. And if European political unity starts to flounder, the euro will be in even deeper trouble. Merkel will be missed.
David Brown is the chief executive of New View Economics
