MERKEL´S NIGHTMARE : THE VOTERS REVENGE / THE FINANCIAL TIMES COMMENT & ANALYSIS ( A MUST READ )

Merkel’s nightmare: the voters’ revenge

By Gideon Rachman

Published: March 14 2011 21:01

These days no European summit is complete without a new deal to solve the eurozone debt crisis. It is always interesting to see how long it takes for the markets to lose faith in the latest solution. Sometimes the fix lasts for months, sometimes for weeks, sometimes just for days.


The deal reached over the weekend in Brussels to strengthen the bloc’s €440bn rescue fund for debt-afflicted nations is the latest rescue package. It will be overshadowed by the horrors in Libya and Japan. That may delay the sceptical reaction in the markets and buy Europe some time. But, have no doubt, the European debt crisis will return.

That is because the fundamental European problem is now not economic – it is political. Euroscepticism is rising across the European Union, both in countries that have received bail-outs and in the countries that have funded them. That is sowing ill-feeling between nations and making it all but impossible for leaders to make necessary compromises.


The row involving Ireland last weekend makes the point. The new Irish government was told it would get a cut in the usurious interest rate that the rest of Europe is charging it, only if the Irish in turn agreed to raise their super-low corporate tax rate. This is a concession that no Irish government can make. Ireland’s ability to set its own corporate tax rate has become a symbol of national sovereignty. Successive governments have promised never to give it up – it seems all the more important as a means to attract investment, as the country struggles to revive its economy.


Yet, for the French and German governments, it is politically imperative to demand a change in Ireland’s tax rates. How can they persuade voters to make concessions to a country that is seen as stealing jobs through “tax-dumping”?


All the governments involved are under enormous political pressure. Enda Kenny, the new Irish prime minister, has just seen the last Irish government eviscerated at the polls by voters enraged by the euro crisis. Nicolas Sarkozy, the French president, is facing opinion polls for next year’s presidential election that see him trailing behind Marine Le Pen, of the far right National Front, which rejects the European project as alien to French national interests.


As for Angela Merkel, the German chancellor, she too fears electoral disaster. The German press and public are screaming about the prospect of further emergency loans to Europe. The courts have threatened to rule the bail-outs illegal. Once reliably pro-European parties, such as the Free Democrats, are increasingly eurosceptic.


In the new economic and political climate inside the EU, none of the key national governments feels it has any room for manoeuvre. On both sides of the euro divide, centrist governments are worried about the rise of nationalist and extremist parties. That makes it much harder to reach EU agreements, which worsens the economic crisis, which then worsens the political crisis.


Germany is the key country pushing for tough, structural economic reforms across the eurozone. Its proposals have been made with France. But the hardline strictures on debt, deficits and later retirement ages, agreed in last weekend’s euro pact, are very German in inspiration.

The Germans are able to call the shots because their economy is booming, while much of the rest of the EU is still struggling. A senior EU official in Brussels says that this is not the old Franco-German relationship that was built on a basis of equality: “Germany needs France to disguise how strong it is. And France needs Germany to disguise how weak it is.”

One country that shares Germany’s take on the euro crisis is the Netherlands, whose recent political history illustrates the pressures on Ms Merkel. Indeed, the rise of German euroscepticism was foreshadowed by events in the Netherlands. The Dutch, like the Germans, were founder members of what became the EU in 1957. The Dutch political elite, like its German counterpart, prided itself on its commitment to European unity.


But the Netherlands’ traditional stance on Europe was thrown into reverse when Dutch voters rejected a proposed EU constitution in 2005. The country’s politicians realised that they had misread voter sentiment and have since adopted much harder-line policies on everything from immigration to European spending. But the rightward drift of Dutch politics has continued. The Party of Freedom of Geert Wilders, which is strongly opposed both to Muslim immigration and to the EU, is now a major force in Dutch politics.


The German chancellor knows that anger about the EU and about immigration are also potent forces in her own country. Mr Wilders has spoken to enthusiastic audiences in Germany and the thought of a German Wilders is Ms Merkel’s ultimate nightmare. That is one of the main reasons she is compelled to take a hard line in European negotiations. The rise of the far right is bad news in France and the Netherlands. But it would be a disaster in Germany.


The trouble is, to fend off the threat of political radicalisation in Germany, Ms Merkel is demanding austerity policies in countries such as Greece that pose a long-term risk to their political stability. European leaders do not know whether to be more frightened of the bond markets or of their own voters.


Copyright The Financial Times Limited 2011.