Angela Merkel’s in-tray: Greece, austerity and banking union

German voters have spoken and put the veteran Chancellor in pole position to form the next coalition government of the eurozone’s dominant economy. Ben Chu examines the  decisions and dilemmas facing Angela Merkel in the wake of her party’s Bundestag victory

Greece

Hopes are growing that the stricken Mediterranean nation’s catastrophic depression might finally be bottoming out, thanks, in part, to a boost from tourism. By some early estimates the economy eked out some growth in the second quarter of the year. And the Athens government, after years of savage cuts, seems to be on course to run a primary (ie before interest payments) budget surplus next year.

Yet at the same time it is widely accepted that Greece will require another debt write-down, funded by its eurozone partners, in the near future if it is to put its public finances on a sustainable trajectory. This poses a headache for Ms Merkel, who promised the Bundestag after last year’s second bailout for Greece that Germany would provide no more financial resources for Athens.

Yet the Social Democrats, who seem likely to be Ms Merkel’s coalition partner, have been much less hardline over Greece than her previous partners in the eurosceptic Free Democratic Party. That should make it easier for Ms Merkel to renege on her earlier promise and provide Greece with the assistance that it needs. Holger Schmieding of Berenberg Bank says: “Some reward for Greece’s efforts is likely to find support in Germany’s new political constellation although any new government will also keep the pressure on Greece to continue the reform process.”

Banking union

Progress on establishing a pan-European banking union has stalled since Mario Draghi managed to calm the financial markets in the summer of 2012 with his “whatever it takes” pledge. The European Central Bank president’s promise to (in extremis) buy up the debt of peripheral states eased the pressure on national leaders to create a credible backstop for their country’s bombed-out banking systems.

That was just as well because Berlin, under the previous coalition, was always unenthusiastic about a banking union even though it had signed up to the principle. Many in her Christian Democrats saw it as a backdoor way of getting German taxpayers to underwrite other eurozone member states.

But the subject has not gone away. A meeting of eurozone finance ministers on 14 October will be asked to approve the European Central Bank as the over-arching supervisor of the bloc’s troubled financial system. That shouldn’t be much of a problem. But with talks on the new coalition in Berlin likely to drag on for weeks or even months, any substantive movement from Germany on sanctioning joint responsibility for the continent’s banking system still looks some way off.

Austerity

The new Bundestag looks less fixated on austerity as the solution to the eurozone’s woes. The Social Democrats, who won 25 per cent of the national vote, have criticised “excessive” public spending cuts and tax rises imposed on bailed out countries. The SPD has also called for a debt reduction fund to assist crisis-hit countries. Others are even more radical. The Green party, with 8.4 per cent of the vote, has backed eurobonds (or jointly issued debt). The Linke party wants the ECB to finance troubled member states’ debts. But eurobonds and ECB debt financing will not happen, because Ms Merkel’s dominant conservative bloc, which has 41.5 per cent of the votes, is implacably opposed. She might, however, establish a committee to examine the debt reduction fund favoured by SPD.

As well as dealing with Greece, Ms Merkel will soon need to make decisions on Ireland and Portugal. Ireland might be able to fund itself in the markets later this year with the backstop of a stand-by credit line from the eurozone. But Portugal, like Greece, may require another official bailout and the terms of that could be contentious. “Hopes of a change in Merkel’s strategy towards a more overtly pro-bailout stance are greatly exaggerated” said Lena Komileva of G+Economics. “[Her] no-drama strategy of small-sized negotiations linked to incremental conditionality will remain.”

German economy

A grand coalition will give the German government a more social democratic complexion. Holger Schmieding at Berenberg Bank expects the election to result in a “modest tilt towards a centre-left agenda at home”. There has been talk of higher income and capital gains taxes, the introduction of more minimum wages for sectors of the economy, and a boost to state capital infrastructure spending. More public spending in Germany, which is still running a sizeable current account surplus, would help the rest of Europe increase exports. But any stimulus is likely to be relatively minor, given the fiscal conservatism of Ms Merkel’s party.

Germany also faces some long-term economic and fiscal challenges, in particular a declining population due to a low birth rate. Immigration is one source of additional labour. But anti-immigrant currents have been building in Germany in recent years. An anti-multicultural tract by a former member of the Bundesbank board, Thilo Sarazin, titled “Germany is abolishing itself”, became a best seller in 2010. Ms Merkel may need to turn this xenophobic sentiment around if she is to cement the foundations of Germany’s continuing prosperity in her third term as Chancellor.

Life and Style
life
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
News
Joan Rivers has reportedly been hospitalised after she stopped breathing during surgery
people81-year-old 'stopped breathing' during vocal chord surgery
Life and Style
Chen Mao recovers in BK Hospital, Seoul
health
PROMOTED VIDEO
Life and Style
One in six drivers cannot identify a single one of the main components found under the bonnet of an average car
motoringOne in six drivers can't carry out basic under-bonnet checks
Environment
Fungi pose the biggest threat globally and in the UK, where they threaten the country’s wheat and potato harvests
environmentCrop pests are 'grave threat to global food security'
News
i100
Voices
Pupils educated at schools like Eton (pictured) are far more likely to succeed in politics and the judiciary, the report found
voices
Arts and Entertainment
Simon Cowell is less than impressed with the Strictly/X Factor scheduling clash
tvSimon Cowell blasts BBC for breaking 'gentlemen's agreement' in scheduling war
Arts and Entertainment
Shady character: Jon Hamm as sports agent JB Bernstein in Million Dollar Arm
filmReview: Jon Hamm finally finds the right role on the big screen in Million Dollar Arm
News
Orson Welles made Citizen Kane at 25, and battled with Hollywood film studios thereafter
people
News
Brad Pitt and Angelina Jolie reportedly married in secret on Saturday
peopleSpokesperson for couple confirms they tied the knot on Saturday after almost a decade together
Sport
footballAnd Liverpool are happy despite drawing European champions
News
i100
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
tv
News
i100
Arts and Entertainment
Diana from the Great British Bake Off 2014
tvProducers confirm contestant left because of illness
Arts and Entertainment
Lisa Kudrow, Courtney Cox and Jennifer Anniston reunite for a mini Friends sketch on Jimmy Kimmel Live
tv
Life and Style
fashion

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Head of Marketing (Online & Offline, Media, Digital, Strategy)

£85000 - £100000 per annum: Ashdown Group: Head of Marketing - Slough, Berkshi...

Database Developer (SSIS, TSQL, Microsoft SQL) London Finance

£35000 - £55000 per annum: Harrington Starr: A Global global asset management ...

Web Developer/UI Developer (HTML5, CSS3,Jquery) London

£55000 - £65000 per annum: Harrington Starr: A Global Financial Service Organi...

JavaScript Developer (C++ / C# / HTML, Java Angular.js) London

£50000 - £60000 per annum: Harrington Starr: A world leading business intellig...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone