September 23: The Beginning Of The End For Merkel... And The Eurozone?

Tyler Durden's picture

Update: sure enough, here is Ambrose Evans-Pritchard with his own perspective on just this topic, which is oddly comparable to Zero Hedge's: "Mrs Merkel's aides say she is facing "war on every front". The next month will decide her future, Germany's destiny, and the fate of monetary union."

Original:

Every time we discuss the futility of the nth bailout of [Greece\PIIGS\Europe\the Euro] we make it all too clear (most recently here and here) that the trade off between Germany onboarding ever more peripheral financial risk in one after another all too brief attempt to prevent the implosion of European capital markets and its currency, is not only a relentless creep higher in German default risk (and lower in the German stock market, as August has so violently demonstrated) but increasing political discontent, which after claiming countless political regimes across the world, has finally settled down on one that truly matters: that of German chancellor Angela Merkel. And as Reuters reports, Merkel's disappointing response to an ever escalating set of crises, both domestic and international, means that the beginning of her end (and by implication of the Eurozone, and of the Euro) may be as soon as September 23, when the vote over the expansion of the latest and greatest European bailout lynchpin, EFSF, will take place.

To wit: "Germany's Angela Merkel faces the biggest challenge to her leadership since coming to power in 2005, with traditionally loyal conservative allies openly criticizing her approach to the euro zone crisis and her hands-off Libya policy in shambles....it is Merkel's piecemeal approach to the euro zone's worsening debt crisis that has come under fire over the past week and now threatens her iron grip on power in Germany." The biggest problem for Merkel is that she has gone "Japanese" in the opinion of the public: doing neither nothing, nor enough, to halt the European crisis in its tracks: "For some in Germany, she has gone too far by bailing out stricken euro zone members and agreeing to intervention in the bond markets to prop them up. For others at home and abroad, she has not done enough, shirking bold steps that might solve the debt crisis because they would be unpopular at home." This latest attempt to placate everyone, while achieving precisely the opposite, will come to a head on September 23 when the vote to expand the EFSF takes place: she is for the time being expected to have a sufficient number of votes to pass the critical for the eurozone proposal. "If it's not enough, Merkel would be forced to resign. It would lead to a crisis." And should there be a crisis, it will be the end for the European experiment as well, since with the political situation at the Euro's biggest financial backer in flux, the free fall in European risk will be one that no one, certainly not the ECB, will be able to arrest. Cue even more improvised bailouts by the central banker oligarchy, yet without Germany, the credibility of any and all such deseprate measures will be nil. This incremental political uncertainty will likely make the life of the FOMC's Sept 20-21 meeting slightly easier, as an adverse monetary announcement by the Fed, contrary to that priced in, coupled with the risk of a full blown European crisis, will be very frowned upon by the Status QuoTM.

From Reuters:

Seen for much of the past six years as a reliable, steady leader whose competence and knack for brokering deals made up for a lack of bold vision, Merkel's image has taken a beating over the past months and polls show an increasing number of Germans view her government as directionless.

 

The chancellor's troubles can be traced back to two decisions taken in March, when she abruptly dropped her long-standing support for nuclear power in the aftermath of the Fukushima disaster in Japan, and days later backed Germany's abstention from a U.N. vote authorising military action in Libya.

 

Coming shortly before a crucial state election, which her conservatives subsequently lost, the steps looked to many in Germany and abroad like cynical political ploys to placate domestic opinion.

 

For some in Germany, she has gone too far by bailing out stricken euro zone members and agreeing to intervention in the bond markets to prop them up. For others at home and abroad, she has not done enough, shirking bold steps that might solve the debt crisis because they would be unpopular at home.

 

This conflict will come to a head next month.

 

Merkel's coalition has a comfortable 20-seat majority in the lower house of parliament. But if she is hit with dissent in her own ranks, and is forced to rely on opposition parties to pass legislation to expand the single currency bloc's rescue mechanism -- the European Financial Stability Facility (EFSF) -- then her coalition could collapse, sparking early elections.

 

"The euro crisis entered a new phase over the past week," influential German weekly Der Spiegel said on Sunday.

 

"Before the main question had been how the common currency could be saved. Now it is also about saving Merkel's chancellorship. If her coalition does not deliver a majority for the enhanced euro rescue mechanism in the autumn, people close to the chancellor say, the coalition is all but finished."

On the significance of September 23:

The chances of Merkel failing to secure her own majority in the EFSF vote, which is likely to take place on Sept. 23, still seem slim.

 

Her Christian Democrats (CDU), hovering at a weak 30 percent in opinion polls, have little incentive right now to bring forward an election that is not scheduled to take place until the autumn of 2013.

 

Merkel's conservative bloc -- composed of the CDU, Bavarian Christian Social Union (CSU) and Free Democrats (FDP) -- has shown discipline in previous euro zone aid votes, with only a handful of lawmakers rebelling.

 

"I expect she will get majority backing from her own coalition," said Gerd Langguth, a political scientist at Bonn University and biographer of Merkel, putting the number of dissenters at around fifteen.

 

"If it's not enough, Merkel would be forced to resign. It would lead to a crisis. No one is interested in an early election."

Slim... but getting bigger:

Critical voices from within the party have grown louder over the past week, with senior CDU lawmaker Wolfgang Bosbach vowing publicly to vote against the EFSF increase and popular Labour Minister Ursula von der Leyen -- seen as a potential successor to Merkel -- wading into the euro zone debate with comments that went against official policy.

Helmut Kohl enters the frey:

Perhaps most damaging of all, however, was former Chancellor Helmut Kohl's rare public criticism of his protege last week. Kohl plucked Merkel out of obscurity in East Germany after the fall of the Berlin Wall in 1989, bringing her into his cabinet and helping to launch one of the most unlikely and astonishing political careers that Germany has ever seen.

 

In an interview with newspaper Internationale Politik, Germany's longest-serving post-war leader and father of reunification broke his silence and unleashed a broadside against Merkel's foreign policy, saying it lacked direction and risked undermining Germany's global influence.

 

"The enormous changes in the world can be no excuse for having no view or idea where you belong and where you are going," Kohl, 81, said.

Yet not even the EFSF vote will do much to help Europe if the German economic implosion (documented here, here and here) continues. Should her own GDP not rebound, it won't matter one bit whether Merkel succeeds in sending the PIIGS to unseen economic golden ages.

However the biggest threat to her hold on power, should she survive the EFSF vote next month, could be the slowing German economy. Data over the past two weeks showed that Europe's biggest economy ground to a virtual halt in the second quarter of the year.

 

Business confidence plunged this month by its largest amount since shortly after the bankruptcy of U.S. investment bank Lehman Brothers in 2008. Some economists now see the risk of a recession in Germany.

 

The country's robust rebound from the global economic downturn of 2008/2009, and sinking unemployment, was one asset Merkel thought she could count on heading into the next election.

 

Now that support is crumbling too, wiping away some more of the magic that she exuded in her first years in office, when she was celebrated in Germany and abroad as the "Gipfelkoenigen" -- or Summit Queen -- for brokering deals with in the EU and G8.

 

"Her downfall may not come from the euro crisis, but simply from the fact that she has lost the shine, the sure footing that she had at the start," said Josef Joffe, editor of German weekly Die Zeit.

At the end, should Merkel drop out of the picture, and Europe be left with finding scraps of capital everywhere else it can, we can't wait for the ensuing hilarity as the future of a failed European experiment then proceeds to be a burden on the far narrower shoulders of one (AAA-rated) Nicholas Sarkozy.