Germans Turn Sour On Greece, As Majority Now Against Bailout, Force Merkel To Commence Political Concessions, Tax Cuts

That Greeks are massively against being "bailed out" in a circular process whereby Europe's bankers rescue Europe's bankers, using Athens as an intermediary is no surprise. What is perhaps also not surprising is that German, or the citizens of the country to truly benefit the most from the "rescue" are also very much against this bailout. According to Goldman's Dirk Schumacher, a poll published in FAS newspaper this Sunday showed that a majority of the surveyed were against any further financial help. Back in May, a slim majority was still in favour of additional support for Greece. The poll also asked how the Euro's future would be assessed: some 71% voiced 'doubts' or 'no trust' or 'no future' for the Euro. Meanwhile, the discussion between the finance ministry and banks about a roll-over of maturing debt continues. The German finance ministry expects banks to make specific proposals during the course of the week. Finance minister Schäuble rejected again the idea of any financial incentives for banks to participate in a roll-over, arguing that banks would have a strong interest themselves to stabilise the situation. The finance minister also said that governments would take preparations for the case of a Greek default if the Greek parliament were to reject the new austerity package this week: "We need to make sure that the contagion risk for the financial system and other Euro-area countries remains low".

As a result, the continuing erosion of Merkel's political base resulted in the first "gift" for Merkel's coalition partners. Per Spiegel, "just a few short months ago, the Free Democratic Party's insistence on pushing through tax cuts -- even as Germany's deficit rose quickly as the country responded to the global economic crisis -- contributed substantially to a worsening of relations with Chancellor Angela Merkel's conservatives in her governing coalition. Now, though, with the German economy moving ahead at full steam and tax revenues rising, the issue is back on the table. And this time it looks like the FDP's wish of tax relief could soon come true."


The German government will approve tax cuts for people with low and medium-sized incomes within this legislature period," Merkel's spokesman, Steffen Seibert, said on Thursday. "It goes without saying that the kind of reductions we are able to provide to people will be contingent on budget developments." Seibert played down speculation of a swift move on tax cuts, saying there was no way they would be agreed by January. It is more likely that any tax breaks would come closer to the next German federal election in the fall of 2013.

Still, the wind certainly seems to be blowing in the right direction for tax cuts. The German economy is buzzing after emerging from the crisis, faring better than most other European nations. Compared to the same period last year, government tax revenues are up by around €18 billion, with much of that coming from full-time permanent employees.

The tax cuts currently being discussed could be worth up to €10 billion ($14.25 billion) annually.

Speaking to SPIEGEL ONLINE, Merkel ally and the head of the Christian Democrats' parliamentary group, Volker Kauder, said the economic situation is strong enough that tax relief would be possible. He also called for a reduction in social insurance premiums, like payments into the state health insurance and pension schemes as an additional way of reducing the burden on average Germans. However, he added, "budget consolidation is the priority."

For the beleaguered FDP, a tax break could be a windfall, giving the party a desperately needed boost in the polls. The party's former chief, Foreign Minister Guido Westerwelle, recently resigned as FDP chairman due to his lack of popularity and strife within the coalition, not in small part due to the obstinate manner in which he insisted on tax breaks. Critics have long accused his party of big-business, clientele politics . And under his leadership, the FDP fell to as low as 4 percent in the polls. Even now, around a month after his departure and replacement by Economics Minister Philipp Rösler, the party is hardly faring any better, hovering at between 4 and 5 percent.

While having a stable economy, for now, tax cuts are not the key priority for Germany. As a reminder, in 2012 Germany will still have to finance 10% of its GDP from external borrowing.

The SPD's budget pointman in parliament also warned against cuts. "We are experiencing an upswing, but we are still borrowing money, so we shouldn't be talking abut tax cuts," Carsten Schneider told the financial daily Handelsblatt. He also stated that Germany's new debt brake balanced budget law also requires that the government build up reserves during prosperous times in order to provide relief during crises.

Alas, when political concessions enter the financial and economic realm, the resulting decisions always end up being the worst possible ones. We are confident that with the increasing weakness of the CDU, the one thing sacrificed the most will be German economic prosperity to buy up the electorate's love to the detriment of long-term economic prospects: a natural push to a strong EUR in the longer run.