Merkel's critical test of strength

German Chancellor Angela Merkel's muscle flexing on the global stage is attracting increasing fire from world leaders, and her stance at Europe's summit may be a turning point.

The G20 summit ended earlier this week with leaders declaring it a resounding success. After two gruelling days of meetings and press conferences, there was an overall sense of achievement from the group of the 20 largest economies. Props all round then.

But there’s at least one politician who’ll be licking her wounds after the summit. Not our own Julia Gillard, who at least got the country some attention with her continuing gaffes, but the other formidable female force at the summit, German Chancellor Angela Merkel.

While Merkel may enjoy flexing her political muscle at every opportunity on the European stage, her strength on the global platform looks to be waning. This was seen clearly at the summit, with a number of leaders doling out advice at every opportunity, and lamenting at how poorly the crisis had been dealt with thus far.

Apart from Gillard’s disastrous attempt to educate Europe on how to resolve the crisis, US President Barack Obama pressed for firm commitments from European leaders on tackling the crisis, while UK Prime Minister David Cameron called for the eurozone to take quick, decisive steps toward a fiscal and banking union.

These attempts to effectively school the euro area on remedying the crisis served as a thinly veiled attack on Merkel as she continues to resist attempts to mutualise debt in the bloc.

Though Merkel has relentlessly resisted buckling to pressure from all sides, it’s doubtful if she can continue on this path without support. With the death of Merkozy earlier this year, Merkel has positioned herself as the defacto leader of the euro area. The bloc has emerged as a pyramid structure, with Germany seated firmly at the top.

But this has been greeted negatively by the peoples of Europe not least because at its core, the EU’s mission has always been to build and promote cooperation between nations in the bloc. This concept is being slowly destroyed as leaders take polar-opposite stances on how to solve the crisis.

Indeed, improved cooperation was the motivation for the European Union's founding fathers, Jean Monnet and Robert Schuman, as they took stock of Europe's post-war situation and birthed the accord.

On this notion, the idea of a more unified Europe gained momentum. The founders believed in creating a peaceful, prosperous Europe as a means of avoiding any further wars.

As the EU grew larger and integration became more deeply entrenched, Europe was hailed a success for seeming to instil a sense of unity among its citizens.

But the onslaught of the euro crisis exposed this notion as a fallacy. Growing divides in the EU show that there is much work to be done if Monnet and Schuman’s dreams are ever to be realised.

As leaders in other major economies grow tired of Merkel’s continuing stubbornness to toe the line, she has found herself increasingly isolated, both in Europe and worldwide.

The G20 summit undermined her position further as she was forced to refute specific claims that her stance against buying up sovereign debt had softened.

Flying back to Germany after the summit, Merkel would have felt relieved as she once again stepped into her safety zone. But this relief looks to be short lived. Her approach of taking baby steps to resolve the crisis may not appease the rest of the euro area for much longer.

The problem with Merkel's position as a defacto leader of the eurozone is that she is acting first and foremost in the interests of Germany, rather than the EU.

As Merkel calls for deeper integration, she deftly rejects calls from Brussels and other leaders to consider the introduction of jointly issued debt across the eurozone, or for a centralised banking authority.

Crucial to Merkel’s decision making, is that next year is an election year in Germany.

As the German public grow increasingly dissatisfied with what they see as their taxes propping up the EU, Merkel faces an ever tough road ahead. Like the leaders of the other 16 eurozone countries, Merkel needs to satisfy her electorate first.

Already, in the wake of the G20 summit, this has become more difficult, as Merkel faces increased pressure from European leaders to amend her stance on a number of issues including mutualised debt and proposals to allow rescue funds buy up bonds of struggling countries.

Ahead of a European summit next week, Italian Prime Minister Mario Monti has issued a dire prediction that the euro will not survive much longer if leaders don’t agree to a lasting solution at the summit.

This is an obvious dig at Merkel as he continues to push for bailout funds to be used to buy Spanish and Italian bonds. Perhaps he was inspired by global leaders’ attitudes at the G20 summit.

Monti is desperate for Merkel to allow EU bailout funds to buy up Spanish and Italian debt. This would avoid the so-called ‘virtouos’ countries having to request formal rescue packages.

The real test of Merkel’s strength will be seen at next week’s summit. Whether she chooses to dictate to eurozone countries or takes a softer stance will be crucial for developments in the coming weeks and months, and for her own future.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles