German Chancellor Angela Merkel and Horst Seehofer Thomas Lohnes/Getty Images

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.