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Whom will Merkel turn to?

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If the results of the latest elections are any indication, Europeans will elect anyone from communists to fascists if they promise to fight German Chancellor Angela Merkel over the financial austerity measures she has imposed on the eurozone.

French Socialist Franßois Hollande rode to victory on a wave of popular dissatisfaction on Sunday, defeating President Nicolas Sarkozy, a close ally of Merkel. "You did not resist Germany," Hollande declared in a televised debate late last week, accusing Sarkozy of acquiescing to German economic measures that require France and other EU states to make deep, painful cuts to their social welfare spending.

Hollande now joins the collapsed Dutch government of Prime Minister Mark Rutte -- which unravelled in late April over resistance to economic belt-tightening -- to deliver a one-two austerity punch to Germany. Compounding Merkel's political isolation on Sunday, voters knocked her Christian Democratic Union out of a governing coalition in a regional election. Although the Christian Democrats secured the most votes in the northern state of Schleswig-Holstein, it was the party's worst electoral performance since 1950.

In a shot across the Rhine, Hollande declared in his victory speech that "austerity is no longer inevitable."

Yet for all his bluster, Hollande likely won't be able to impose radical change on Europe's core economics. The powerful German economy has kept the euro afloat as Greece, Italy, Spain and other countries have drawn perilously close to the brink of collapse. Its remains the engine of European prosperity.

Under the fiscal treaty Merkel advanced this year, EU member states are required to ensure that their "deficits do not exceed three per cent of their gross domestic product at market prices" and must maintain strict limits on government debt. The treaty goes to great lengths -- with corrective measures and potential legal action against member states -- to prevent a repeat of a Greek-style economic meltdown.

On Sunday, however, Hollande promised a "new start for Europe," spelling a possible wholesale revision of the fiscal treaty. All this has investors worried: His victory on Sunday, along with the weekend's anti-austerity Greek election results, prompted the euro to sink to a five-month low of $1.2988.

All this helps explain Gideon Rachman's recent Financial Times commentary, No Alternative to Austerity, in which he notes that France is "a country where the state already consumes 56 per cent of gross domestic product, which has not balanced a budget since the mid-1970s, and which has some of the highest taxes in the world."

Of course, this is all anathema to the rule-abiding Germans. In 2003, Merkel's predecessor, Social Democratic Chancellor Gerhard Schroeder, introduced his Agenda 2010, a sort of watered-down version of U.S. president Bill Clinton's "welfare-to-work" program, which cut taxes, unemployment benefits and other social welfare programs. The reforms brought German unemployment down from five million in 2005 to 2.8 million. Merkel imposed similar discipline across the eurozone, and Sarkozy helped her.

"Europe must be pulled out of paralysis," declared Sarkozy on his first presidential visit to Berlin after his May election victory nearly five years ago. Merkel reciprocated, culminating in a political alliance to retain EU unity and eventually impose robust fiscal discipline on the 17 eurozone countries. The unlikely fusion of these two leaders -- "Merkozy" -- advanced an ambitious plan to prevent the European Union from fragmenting.

But whom will Merkel turn to now? This year, British Prime Minister David Cameron withdrew his support for the fiscal compact and declined to meet with Hollande during his February visit to Paris. Merkel, like her British counterpart, expressed a preference for a second Sarkozy term.

Although Merkel said earlier this week that the fiscal accord is "non-negotiable," she stressed that "German-French co-operation is essential for Europe" and that her administration will welcome Hollande "with open arms." For his part, Cameron congratulated Hollande on his victory and said that Britain will continue to develop its "very close relationship" with France.

Needless to say, both leaders recognize that, as Europe's second-largest economy, France is vital for EU monetary stability. Together, Germany and France have navigated Europe through an economic minefield. Merkel has served as a tough schoolteacher, cracking the whip and delivering tough love, but also bailing out Greece with German credit to prevent the periphery -- and potentially the eurozone as a whole -- from imploding.

In an age of financial meltdowns and seemingly bottomless unemployment, Merkel has presided over an economic miracle -- German industrial orders rose 2.2 per cent in March -- but she can't impose austerity on her own, and she faces some tough decisions now.

Hollande seeks to renegotiate Merkel's fiscal treaty to include economic growth measures, including more public spending to generate employment. Consequently, she will be caught in an economic vise. Merkel can either block French stimulus actions (and possibly spook the eurozone market) or continue to champion a strict economic diet for Europe.

If the odds look stacked against Merkel right now, it's still too early to bet against her: She's clever, pragmatic, and given to compromise. Like Sarkozy before him, Hollande may soon find himself unable to resist Germany, too.

Benjamin Weinthal is the Berlin-based European correspondent for the Jerusalem Post and a research fellow at the Foundation for Defence of Democracies.

--Foreign Policy

Republished from the Winnipeg Free Press print edition May 9, 2012 A13

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