Wait for Angela

The Economist: In Europe it will be Germany that calls the tune, says John Peet

The euro crisis has become a misnomer: the word “crisis” refers to a decisive moment or turning-point, which the euro never seems to reach. The single currency’s complaint is more like a chronic illness that is neither strong enough to kill the patient nor weak enough to be easily cured. That will remain true in 2013: the euro will survive, but not regain its full health.

This prediction has three explanations. First, the president of the European Central Bank (ECB), Mario Draghi, has said that the ECB is ready to intervene enough to stop the single currency disintegrating. But that is still a stopgap: if it is to keep doing this, the ECB has also made clear that it will need to see more political progress towards a banking union and the kind of fiscal and political integration that might eventually include common deposit insurance and a form of partial debt mutualisation.

This is the second factor explaining why the health of the euro will remain precarious. Although the euro zone’s leaders are moving forward on these measures, they are doing so fitfully and reluctantly, largely for political reasons. To jump into a full banking and fiscal union, including common deposit insurance and debt mutualisation, would have two awkward implications: that creditor countries make transfers to debtors, and that all euro-zone members surrender substantial sovereignty. The Germans, Finns, Dutch and others are hostile to the first; the French, probably the Spanish and others are wary of conceding the second. So progress will be slow in 2013. Bailed-out banks may come under European-led supervision early in the year and all big banks by the summer, but German resistance will delay the date for smaller banks beyond the end of December 2013.

That is also for a third reason: voters will want a say. Europe will have several important ballots in 2013. Italy must hold a general election by May. Since November 2011 it has been run by a government of technocrats, led by Mario Monti. Italy’s politicians have, in effect, asked Mr Monti to push through structural reforms and budget cuts that they could not impose themselves, in order to keep the country in the euro zone. Some Italians hope Mr Monti will stay on after an election. But it is more likely that there will be a coalition led by the left-leaning Democratic Party. That will continue the trend since the euro crisis erupted in 2010 of incumbent parties and governments being kicked out by the voters. It has happened in Greece, Ireland, Portugal, Spain, Finland and, in the summer of 2012, in France.

Yet it will not happen in the most important election of all in 2013: Germany’s, due in September. The significance of the German election was captured in a cartoon before the Spanish election in November 2011, in which one Spaniard asks another who will run the country afterwards and gets the reply: “Angela Merkel”. Ever since she became German chancellor in 2005, Mrs Merkel has been by far Europe’s most important political leader. In the euro crisis, it has been Mrs Merkel, head of the biggest creditor country, who has ultimately decided what to do and how fast to do it.

Mrs Merkel, who leads Germany’s Christian Democrats, is hemmed in both by the electorate’s hostility to bail-outs for profligate countries and by a constitutional court eager to protect the Bundestag’s prerogatives over public money. The court’s influence means that it is lawyers, not economists, who count when it comes to deciding on policy towards the euro. That makes it unsurprising that Mrs Merkel has been leery of putting her taxpayers’ money at risk. Other European leaders, including Mr Monti and France’s François Hollande, criticise her for wanting excessive fiscal austerity and opposing any debt mutualisation. The Germans have also had brickbats for sometimes hinting that Greece might have to leave the euro, which most others think would imperil its very survival.

Yet Mrs Merkel’s stubborn protectiveness of the German taxpayer is strongly supported at home. And that puts her political opponents in a bind. She has successfully sidelined would-be rivals on her own side, helped by personal approval ratings that are consistently higher than her party’s. Her coalition allies, the Free Democrats, are in the doldrums and may struggle to win the 5% of the vote needed to stay in the Bundestag. And the main opposition parties, the Social Democrats and the Greens, have found it hard to lay a glove on Mrs Merkel. A brief attempt to outflank her by being more European (and more open to Eurobonds) fell flat.

President in all but name

Even so, 2013 will not be an easy year for Mrs Merkel. With Mr Hollande now in the anti-austerity camp, she will be increasingly isolated at euro-zone summits. The German economy, long seemingly immune to the euro crisis, is flirting with recession; unemployment, which had been at 20-year lows, is rising again. Germany’s fragmented politics, with a new Pirate Party likely to join the Left party and the Greens in the Bundestag, will make coalition-building after September exceptionally hard. Yet the Christian Democrats are all but certain to emerge as the biggest party in the parliament.

The issue will then be Mrs Merkel’s choice of coalition partner. Because the weakened Free Democrats will not be of much use and any alliance with the Greens will be tricky, the most likely outcome is a repeat of her 2005 “grand coalition” with the Social Democrats. That may suit her temperamentally, and it could make it easier to deal with the euro crisis. The pressure of events and markets has steadily pushed her into being more accommodating to her euro-zone partners. In a grand coalition, she may be able to shift even more, perhaps to the point of accepting the notion of debt mutualisation through Eurobonds.

And what would Mrs Merkel do if the euro crisis eventually did reach a turning-point and the patient were cured? The European Union and the European Commission will both need new presidents in 2014. Perhaps Mrs Merkel should combine the two jobs to become the official, and not just the backroom, president of Europe.

John Peet: Europe editor,The Economist