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Merkel, the voice of Europe 2012 and 2013

The pre-eminence of Germany is becoming increasingly clear in the eurozone. David Brierley of SNL Financial provides his thoughts on what the future holds for the European economy.

Merkel, the voice of Europe 2012 and 2013
David Brierley is a senior writer with SNL Financial. The views and opinions expressed in this piece are those of the author and do not necessarily represent the views of SNL.

Europe's voice of 2012 belongs to just one person: German Chancellor Angela Merkel. And hers is likely to be the voice of 2013.

Her presence on the radio and television news programs across Europe is emphatic and undeniable. Voiced over into French, Spanish, Italian or Portuguese, she plays an increasingly visible and audible role in the domestic politics of the eurozone.

Her voice resounded on Spanish radio Dec. 17, expressing support for Spanish Prime Minister Mariano Rajoy. She stated that just as she and her government would decide upon German policy, Rajoy and his government would determine Spanish policy.

The comments came in the context of the injection of €40 billion of capital into Spain's banking system and the question whether Spain needed to be rescued by the EU. That decision, Merkel said, had to be Spain's.

It is a polite fiction. Spain's proud independence is effectively undermined by Merkel's comments.

A similarly powerful and difficult message was transmitted to Italy on the premature resignation of Mario Monti as prime minister and the possible return to power of Silvio Berlusconi. Merkel said: "I support what the government of Mario Monti has achieved."

It was as clear an electoral message as that of the pope when delivered from pulpits across Italy before election days.

Merkel and her Berlin colleagues assured Italy they had no desire to involve themselves in electoral politics. But, she added, she is sure that Italians "will choose to make sure that Italy stays on the right path."

National independence is faltering with the eurozone. Germany has stepped into the power vacuum left by weak institutions in Brussels and Strasbourg and weak economies.

Merkel is leading the way. Her speech Dec. 13 to the Bundestag praised the austerity efforts of Greece, Ireland, Portugal and Spain. She was not just speaking to Germany when praising "solid budgeting" in the EU and demanding better coordination to secure competitiveness.

It might not have quite been the speech of the president of the United States of Europe but it was that of Europe's political leader. No other leader in Europe would dare to talk that way. Merkel set out the route ahead, which is not so different from the route behind.

Elections in Italy in February 2013 and Germany in September 2013 are unlikely to lead to change. It seems plausible both Monti and Merkel will emerge as victors.

Monti now looks set to head a centrist grouping, which could coalesce with the largest Socialist Party to form a new government in Rome. Berlusconi has responded with a broadside on the Merkel-led policy pursued by Monti. "The politics of austerity lead to recession and depression," he said. "There is a need for a complete change to economic policy."

Across Europe, voters and citizens will be raising this issue in 2013. It promises to be a long, tough year.

Abi, the Italian banking association, said Dec. 20 that Italy faces recession, Italians will see disposable income fall and the banks will struggle for finance while the Italian sovereign will groan under debts amounting to 126% of GDP.

While there are great differences among eurozone countries, high debts (public or private) and low growth will haunt most, if not all.

Merkel's remedy is more austerity.

It is not a program given a strong voice by French President François Hollande, though Paris is slowly moving to adopt austerity. While more aid for Greece and a deal on European banking supervision were recently agreed, the Franco-German axis looks very weak. The U.K. government has sidelined itself in the debate.

This leaves Merkel alone and center stage to advocate slow and painful consolidation by austerity. The rating agencies are pressing France and the U.K. to comply.

The result is dispiriting. With banks deleveraging, governments cutting spending, real incomes falling and unemployment rising, economic growth is ever less certain.

"In addition to the persistent difficulties of the southern countries we are now seeing the center economies faltering as they find it increasingly difficult to replace 'domestic' European demand with demand from outside the eurozone," Crédit Agricole economists wrote in a new quarterly newsletter, while calling for "real progress" on creating the United States of Europe in 2013, given the dangers of "a certain market unease about Europe."

Unease across Europe was already very visible in 2012.

In Lisbon and Athens, where Merkel spoke to defend austerity, she faced protests against what was seen as Berlin's policy. Her Madrid visit in September was quieter, yet Spanish citizens in the street vociferously blame the Germans for Spain's troubles.

Resentment against Merkel has inevitably risen, leading to undeserved comparisons with Hitler and the Third Reich, especially in Greece, where violence and political extremism are rising. The Berlusconi family's Il Giornale has talked about the Fourth Reich and been personally insulting to Merkel.

Clearly the austerity and reform process has further to run or, as Crédit Agricole expressed it, "large-scale balance-sheet adjustments still have some way to go" in the periphery.

Budget deficit targets have been missed throughout 2012 as austerity has hit tax receipts. Only Germany has unveiled a fiscally neutral budget while across the eurozone aggregate budget cuts amount to 1.6% in 2012 and 1.1% in 2013.

A growth policy is needed but elusive. Internal eurozone trade has fallen by 6.7% since early 2011, making the area highly dependent upon China and the U.S. for stimulus. The eurozone was in recession in the third quarter of 2012 and this looks to have continued in the fourth quarter. Little better is to come. Investec is predicting a 0.4% decline in eurozone GDP in 2013 while Crédit Agricole expects zero growth.

This continuing and grinding economic weakness will generate more political discontent. It will surely force European governments to ease budgetary rigor. And it will test the ability of Merkel to speak for Europe. Yet her voice will be heard in 2013.

Read the full blog here: http://www.snl.com/InteractiveX/Article.aspx?cdid=A-16671105-14125

Mercredi 9 Janvier 2013

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