Merkel’s House Divided
After years of blocking eurozone reforms at every turn, German Chancellor Angela Merkel has suddenly come out in favor of a common budget. But the reason is not that she has seen the economic light; it is that she needs help facing down a domestic political rebellion that could very well topple her government.
BERLIN – Divisions within Germany’s ruling coalition over refugees have started to jeopardize Chancellor Angela Merkel’s control of the government. To put down a rebellion launched by her own interior minister, Horst Seehofer of the Bavaria-based Christian Social Union (CSU), Merkel now must secure agreements with other European Union member states to bring order to Europe’s asylum system. And that, in turn, requires German concessions on eurozone reforms.
Germany has always been the foremost beneficiary of the EU’s incoherent economic status quo. In the absence of a joint fiscal policy, the common currency shared by Europe’s poorer south and its more productive north has the effect of artificially boosting German exports. It is little wonder, then, that Merkel-led governments have consistently opposed eurozone reforms, including those proposed by French President Emmanuel Macron last year.
But now, cyclical economic developments and Merkel’s own domestic vulnerability are forcing a change. Not long ago, the German position in eurozone-reform negotiations was to offer the bare minimum: redesigning the European Stability Mechanism to turn it into something resembling a European Monetary Fund. Yet during a recent summit with Macron at the German chancellor’s residence in Meseberg, Merkel agreed to far more ambitious reforms than anyone expected. Crucially, she and Macron announced plans for a common eurozone budget, to be funded by a financial transaction tax and EU disbursements.
Merkel’s concession represents a significant departure from what she was willing to accept only a few weeks ago: namely, a program to extend jointly financed loans to troubled eurozone member states. Now that she has agreed to a common budget, existing EU treaties will have to be amended.
But that will not be acceptable to the Netherlands, which leads the Hanseatic League (comprising the Scandinavian and Baltic countries), or the Visegrád Group (the Czech Republic, Hungary, Poland, and Slovakia). In fact, the Meseberg agreement will be rejected by Germany itself: the electoral base of Merkel’s Christian Democratic Union opposes a eurozone budget, as do CSU voters, not to mention the far-right Alternative für Deutschland (AfD) and the liberal Free Democratic Party (FDP).
Merkel knows the European and German political scene better than anyone. Why, then, has she made the decision to meet Macron halfway? The answer is that she now needs something from him and the southern eurozone countries that have become transit points for migrants and refugees. At home, Merkel has come under fire from Seehofer, who is demanding that the government send back all refugees who have already been registered in another EU country.
Seehofer’s hardline position on refugees partly reflects the challenge his party faces from the AfD in Bavaria’s elections this fall. But Seehofer is not just playing domestic politics. He has also been undercutting Merkel’s foreign policy, by throwing his support behind other populist and nationalist leaders such as Austrian Chancellor Sebastian Kurz, Hungarian Prime Minister Viktor Orbán, and even Russian President Vladimir Putin. As a result, Bavaria is now part of an anti-refugee crescent that runs through the Visegrád Group, Austria, and Italy.
Merkel has suggested that she would dismiss Seehofer were he to issue a ministerial directive for returning refugees. Her own approach is to push for a pan-European refugee agreement at an EU summit later this month. And last week, she met with the leaders of Italy, Greece, France, Austria, Bulgaria, and the Netherlands, whose help she needs to restrict the movement of asylum seekers within the EU. In exchange, Greece no doubt wants debt relief; Italy wants looser EU fiscal rules and a change to the European Central Bank’s mandate to include bond purchases; and Bulgaria wants a fast track to eurozone accession.
Merkel’s sudden diplomatic flexibility suggests that Seehofer’s pressure campaign is working. But the political fallout remains to be seen. As matters stand, the CSU could simply accept economic concessions in the eurozone negotiations, though that might hurt it in the upcoming elections. Alternatively, it could break its eternal partnership with the CDU, now that its public support has reached 18%, second only to the CDU’s 22%, according to a recent INSA poll. If the CSU rebels, the CDU can put forward its own candidates in Bavaria. But this is hardly a viable option, as a civil war between the two allied parties would sink them both.
There is a third possibility, though. Merkel could be toppled and replaced by someone further to the right on the refugee issue – a German version of Kurz – such as the CDU’s Jens Spahn, who is currently serving as the federal health minister. Merkel recognizes this possibility – which, as it stands, appears to be the most likely scenario for Germany – but she has little choice but to draw out the game in the hope that some other solution will emerge.
Given the risks Merkel faces, Macron cannot expect her to stick her neck out too much. Moreover, he himself will have to tread carefully, because Merkel is one of his only allies within the EU. In addition to the Visegrád countries, the Baltic states, Scandinavia, and the Netherlands are all more or less aligned against him on issues relating to eurozone reform. And now Euroskeptic populists are in charge in both Austria and Italy.
Even if a suitable candidate could be found to replace Merkel, that person would not be able to match her in standing up to the likes of Putin and US President Donald Trump. A Germany without Merkel at the helm would be a boon to populists everywhere. If Seehofer’s tactics really do result in Merkel’s removal from power and her replacement by someone like Kurz, it will be clear that Orbán and Jarosław Kaczyński, Poland’s populist de facto leader, are not some kind of Eastern European anomaly, but rather an avant-garde, presaging what awaits the EU.
Are Europe’s Populists Calling the Shots?
Less than six months after forming another grand coalition government, German Chancellor Angela Merkel is now fighting for her political life against a pan-European alliance of anti-immigration forces. But whether or not she holds on to power, it is already clear that Germany's unique influence over EU affairs is waning.
BERLIN – In 2011, Italian Prime Minister Silvio Berlusconi was forced from office by French President Nicolas Sarkozy and German Chancellor Angela Merkel, and replaced by Mario Monti, an able technocrat who looked like he had been designed in a laboratory by the European Commission and Goldman Sachs.
But now the boot is on the other foot. An extraordinary populist coalition comprising Hungarian Prime Minister Viktor Orbán, Austrian Chancellor Sebastian Kurz, Italian Minister of the Interior Matteo Salvini, and German Federal Minister of the Interior Horst Seehofer is threating to oust Merkel over her migration policies.
In an attempt to shore up her position, Merkel recently held a summit with French President Emmanuel Macron at Meseberg Castle outside of Berlin, where she agreed to a European Union reform agenda that would seem to go beyond most Europhiles’ wildest dreams.
But the Meseberg summit itself looked more like a Franco-German conclave than a relaunch of the European project. Macron is trying to protect Merkel from the rebellious forces within her own governing coalition, and both leaders are acting like they are still the masters of the universe. Yet for all their talk of transforming the European Stability Mechanism into a European Monetary Fund and reining in the Italian government’s behavior on refugees, one gets the sense that it is the populists who are calling the shots.
The era when Germany could resolve European crises by effectively making domestic political decisions for other member states seems to have ended. In the current standoff, it is Merkel’s Germany that is now the spielball (“playing ball”). Decisions that may determine the fate of her government are being made in Rome, Sofia, and other capitals on the European Union’s periphery.
This shifting balance of power is most evident in Merkel’s eagerness to meet with Orbán at an EU summit in early July, just three months after she refused to congratulate him on his reelection. Since then, several factors have changed the state of play in European politics.
For starters, Seehofer’s Christian Social Union, the Bavarian sister party to Merkel’s Christian Democratic Union, is preparing to fend off the far-right Alternative für Deutschland in regional elections this October. The CSU regularly hosts Orbán at its party meetings, and he and Seehofer have been in close contact throughout the refugee crisis.
Second, Kurz, in a coalition with the populist Freedom Party of Austria (FPÖ), recently declared that overhauling EU migration policies would be a top priority for Austria during its presidency of the Council of the European Union. And, third, in early June, Italy’s Five Star Movement and Salvini’s right-wing League party formed a government that combined two very different strands of populism. In doing so, they have created a template for left-wing anti-austerity populists and right-wing anti-immigration populists to forge similar alliances in other member states – including Germany.
As interior minister, Salvini has taken a hard line on migration, not least by turning away vessels carrying asylum seekers rescued from the Mediterranean. And his approach is inspiring Seehofer and Kurz – ever the opportunists – to double down on their own immigration proposals.
As Germany’s interior minister, Seehofer wants to start turning away asylum seekers who have already registered in other member states. This has pitted him against Merkel, who would prefer to forge an EU-level agreement to fix Europe’s asylum system.
Earlier this month, just as Merkel and Seehofer’s dispute was heating up, Kurz made an appearance in Berlin, where he called for Austria, Hungary, Italy, and Germany – or, at least, Germany’s interior ministry – to form an “axis of the willing” on migration. Kurz also tried to undercut Merkel in early 2016, when he was serving as Austria’s foreign minister. Appearing on live German television, he declared that he would close the Balkan route for refugees fleeing Syria for Northern Europe.
Merkel was able to fend off this earlier attempt at domestic interference. But today, both Europe and Germany’s divisions have widened, and she must find a way to bridge the gaps. For example, while Dutch Prime Minister Mark Rutte has doubled down on his opposition to a eurozone “transfer union,” Merkel has agreed, in principle, to Macron’s proposal for a joint eurozone budget.
Yet Germany is caught in the middle of the “fiscally responsible” Hanseatic League (Northern Europe), the anti-immigration Visegrád Group (the Czech Republic, Hungary, Poland, and Slovakia), and anti-austerity forces in the southern eurozone. In an earlier era, a strong, visionary chancellor could have exploited the fact that these different currents are all present on the German political scene. In fact, after Russia’s annexation of Crimea in 2014, Merkel herself was able to forge domestic compromises that worked for the entire continent.
But the key difference between then and now is that the US government no longer has an interest in a strong, united Europe – or in global stability, for that matter. After the annexation of Crimea, Merkel could count on then-US President Barack Obama’s support. The same cannot be said for President Donald Trump or Richard Grenell, his chosen ambassador to Germany, both of whom are actively undermining Merkel’s domestic credibility.
Of course, Merkel cannot be written off yet. After 13 years in power, she has shown herself to be extraordinarily resilient and capable of facing down ambitious macho men. Seehofer, Kurz, Salvini, Orbán, and Trump would all do well not to underestimate her.
Still, Europe is at a critical juncture. Those who favor deeper integration and openness have wasted a lot of time, while populists and nationalists have marshaled their forces. After their summit at Meseberg Castle, one can only wonder if Macron and Merkel are ready for an extended siege.
The Battle for Germany’s Soul
Although the flow of migrants and refugees into Europe is far below what it was in 2015 and 2016, immigration remains a hot-button issue across the continent. In Germany, an escalating debate over migrant and refugee policies could even decide the future of the country's role in Europe, and of European integration more generally.
STOCKHOLM – One year after the death of former German Chancellor Helmut Kohl, the country he led for 16 years seems to be struggling with whether or not to follow his legacy.
For Kohl, Germany’s history and central position in Europe meant that it must never pursue national greatness as an end in itself. To his mind, the country with more neighbors than any other country on the continent should not throw its weight around. Rather, it should uphold an idea of Europe in which all countries, large and small, feel equally secure.
But since the start of the refugee crisis in the fall of 2015, Kohl’s vision of Europe has been under attack. While Chancellor Angela Merkel has continued to press for cooperative migration and refugee policies within the European Union, a growing chorus of voices in Germany is advocating unilateral action that would most likely come at the expense of other EU member states.
On the surface, the debate consuming Germany nowadays is about whether to turn away asylum seekers who have already been registered in other EU countries, as the federal interior minister, Horst Seehofer of the Christian Social Union (CSU), has advocated. But at a deeper level, the question for Germany is whether it should go it alone or continue to seek common European solutions.
In this new age of identity politics, the dispute over immigration has become a battle for Germany’s soul. Last September, the Alternative für Deutschland (AfD) became the first far-right party since the 1960s to enter the German Bundestag. Then, after the formation of the current grand coalition government, the AfD became the main opposition party. And now it is pushing the CSU further to the right in the lead-up to Bavaria’s regional election this October.
These developments in Germany are in keeping with trends across Europe, where nationalist and populist parties have made electoral gains by rejecting EU-level solutions and calling for closed borders. In Italy, the nationalist League party appears to be calling the shots in its new governing coalition with the populist Five Star Movement. And in Austria, the far-right Freedom Party is exerting its influence on migration policies as a member of the governing coalition.
If one were to listen to these parties’ rhetoric, one might think that refugees and migrants are pouring into Europe unhindered. But while the Balkans did become a highway for asylum seekers fleeing Syria for Germany and Sweden in 2015 and 2016, that route was effectively closed down when Turkey agreed to host refugees in exchange for EU financial aid. And though the refugee situation in the Central Mediterranean continues to make headlines, the number of migrants crossing from North Africa has actually declined sharply over the past year.
Still, immigration has remained a hot-button issue across Europe, owing to the shock of the initial refugee crisis, which still reverberates in voters’ minds. Politics is about perceptions, not raw numbers. And populist and nationalist parties have managed to paint a picture of a Europe under siege.
In the current political environment, if Germany were to send refugees back to Austria, then Austria would almost certainly send them back to Italy. But that would take the EU back to the same situation that it was in before, when asylum seekers were not being registered on arrival in Italy, and when it was all the more difficult to turn them back at other borders. Inevitably, the situation would degenerate into a volatile mess, with EU member states pitted against one another, and populists commanding center stage.
Kohl’s Germany, by contrast, would consider the European dimension of its policies and shape them accordingly. It would not simply dump its national problems on its smaller neighbors, because it would recognize that their security is synonymous with its own.
The attack on Kohl’s vision by nationalist forces could have ramifications well beyond the immigration debate. At stake is not just Germany’s role in Europe, but also the future of European integration. A Germany that abandons Kohl’s legacy would suddenly become a source of deep uncertainty, rather than a bastion of stability at the center of Europe. With the West already under attack by the likes of Russian President Vladimir Putin and US President Donald Trump, that is the last thing Europe needs.
To be sure, the immediate crisis will most likely be resolved through a series of imperfect compromises – both at the EU level and within Germany’s governing coalition. That, after all, is often how the EU works, as in the case of the Greek sovereign-debt crisis.
The matter is unlikely to end there. German wavering on Kohl’s legacy is a trend that is larger than any single issue. But how the refugee debate plays out in the coming weeks will reveal much about Germany’s future direction – and about the future of Europe.
When Populism Comes Home to Roost
It remains to be seen if the emergence of a Euroskeptic, anti-establishment government in Italy will pose a threat to the euro and the European Union. But it is already clear that Europe's mainstream politicians bear as much responsibility as Italians for the country's populist wave.
ROME – Debates about the euro usually contain proposals for complex financial arrangements to build “resilience” against the next economic shock. Yet the shock that we are currently witnessing is political. Populists are making gains across the European Union, and Italy, a founding member, is now governed by a Euroskeptic coalition comprising the populist Five Star Movement (M5S) and nationalist League party.
As is always true when anti-establishment forces take power in a G7 or EU country, the question now is what comes next, and whether there is a route back to normalcy. In Italy’s case, it is too soon to tell. But in the meantime, we can reflect on what lessons there may be for Europeans as they attempt to contain the populist tide.
The main lesson is that European countries cannot face down today’s resurgence of populist nationalism and jingoism unless they cooperate. Unfortunately, the response to populist gains so far has been similar to the beggar-thy-neighbor response to protectionism in the 1930s, with each country trying to shift the problem on to others until it comes back to bite everyone.
In 2015, Italy’s then-prime minister, Matteo Renzi, convinced the European Commission that his government needed more “flexibility” for deficit spending in order to keep M5S at bay. This bending of EU budget rules predictably enraged the German public and fueled support for the far-right Alternative für Deutschland (AfD), now the main opposition party in the Bundestag. But, of course, popular anger is also what forced the German government to impose overly strict terms on Greece in 2015, thus inflaming a populist revolt in that country, too.
Likewise, populist anger in the Netherlands and Germany over bank rescues led to the enactment of strict anti-bailout legislation at the EU level after the 2008 financial crisis. But that legislation then prolonged Italy’s credit crunch, which, in turn, fueled populism there. Then came the start of the refugee crisis, when Italy waved migrants through the Alps, essentially outsourcing the problem to France and Austria. That boosted the electoral prospects of the ultra-nationalist Freedom Party of Austria and the far-right National Front in France. Eventually Austria and France sealed their own borders, setting the stage for the League to capitalize on public anger over immigration.
Of course, the roots of Italy’s populist turn are also domestic and historical. Owing to the failures of past governments, Italy has not experienced per capita GDP growth for two decades. And productivity in the service sector – which is the least exposed to global competition – has been stagnant since the 1990s.
These are problems of Italy’s own making. After 1945, Italy reformed its political institutions but failed to make necessary changes to its economy. Though it had moved from dictatorship to democracy, the trappings of the fascist system lived on through a corporatist approach to market regulation and widespread government meddling in finance and industry. Some features of the old system eroded further after 1992, under the Maastricht Treaty, but others persisted.
For example, as a result of centralized wage bargaining, average private-sector compensation is just 6% lower in Italy’s South than in the North, even though the North’s productivity lead over the South is far greater. Under such conditions, there is no good reason to invest anywhere south of Rome, which explains why the region’s per capita GDP has fallen 30% below the eurozone average since 2001. Against this backdrop, it is little wonder that 47% of Southerners voted for M5S, whose proposal for a universal subsidy would well suit an economy held back by fascist-era corporatism.
Corporatism is simply incompatible with a monetary union. Yet it is difficult to reform because of the dependencies it creates. That is why multiple past governments failed to modernize the economy. After Silvio Berlusconi was forced out of the premiership in 2011, the technocrat Mario Monti did take some action, but in the run-up to the election, progress slowed to a halt. Renzi, too, pursued limited reforms, but eventually fell prey to his own outsize ego.
But even with more effective leaders, Italy would have faced EU headwinds. The conservative fiscal response to the post-2008 recession, combined with the European Central Bank’s dithering before July 2012, led to excessive austerity, which wreaked havoc on the Italian middle class, pushing it toward populism. When Monti took office in November 2011, M5S and the Northern League (as it was then called) were polling below 10% combined; today, that figure is well above 50%.
Italy spent a fraction of what many other advanced economies marshaled (as a share of GDP) to bail out banks after the 2008 crisis. But its abrupt bank “bail-in” in 2015 forced small savers to take a loss, and boosted M5S just as its fortunes were flagging. In hindsight, ordinary Italians’ financial losses, coupled with the sentiment that the EU had left them to deal with the refugee crisis on their own, made the populist backlash all but inevitable.
Italy’s political situation shows how toxic Europe’s approach to populism has become. As mainstream politicians across the EU try to protect their flanks against domestic populist threats, the defenses they mount stoke populism in neighboring countries. The result is a domino effect, which has become the main threat to the future of the euro and the EU.
Mainstream politicians have failed to come together to combat populism because they are focused wholly on their own careers and the next election. But, sooner or later, they must realize that a beggar-thy-neighbor strategy will always come back to haunt them in the end. That is why Italy, like Greece in 2015, could soon pose a threat to all of Europe.