March 3, 2021

News Analysis: German Dissent Magnifies Uncertainty in Europe

Global financial markets are expected to go through another rough week as the euro zone’s debt crisis gets messier, and Germany, the euro’s self-styled guardian, is playing a large role in magnifying the uncertainty.

Despite repeated pledges by Chancellor Angela Merkel to keep Europe together, the cacophony of dissent within her country is becoming almost deafening. That is casting fresh doubt — whether justified or not — over the nation’s commitment to the euro.

“The German electorate is not in the mind-set to undertake actions it sees as subsidizing less worthy nations,” said Carl Weinberg, the chief economist of High Frequency Economics in Valhalla, N.Y. “As a result, the government is moving in a very isolationist way to try to establish a fortress Germany that’s economically secure despite the risks in its European Union partners.”

This weekend, Der Spiegel reported that the German government was starting to prepare for a Greek insolvency and was devising various responses to handle a potential default, including allowing Greece to abandon the euro and return to the drachma. The government in Berlin would not comment, but such reports only add to the doubts bedeviling the euro monetary union.

On Friday, a stalwart German member of the European Central Bank, Jürgen Stark, abruptly resigned — news that would have barely merited more than a few lines in the financial pages just a few years ago.

Today, it is considered a sign of disenchantment within Germany of the extraordinary measures being pursued to maintain stability in the euro zone, adding to the wild volatility in financial markets around the world.

“Mr. Stark’s departure could be seen by financial markets as another indication of growing disenchantment in Germany towards the euro,” Julian Callow, chief European economist at Barclays, wrote in a note to clients.

All this has generated severe discomfort in Washington, which has watched the market volatility stoked by the European debt crisis with growing alarm.

The U.S. Treasury secretary, Timothy F. Geithner, has been in regular contact with his European counterparts, repeatedly calling on them to speak with a single voice to help reduce confusion in financial markets. After a series of frank discussions with many of them Friday at the meeting of the Group of 7 finance ministers in Marseille, he declared that “European officials fully understand the gravity of the situation there.”

Finland, the Netherlands and Austria have all spoken with dissonant voices on the Greek bailout, revealing deep divisions among Europe’s strongest countries about how far they should go to save their weaker neighbors.

Continued fears over the state of European banks, and French ones in particular, have also roiled financial markets, especially after Christine Lagarde, the managing director of the International Monetary Fund, warned that European banks needed substantial additional capital.

Meanwhile, fears over Greece are only likely to intensify this week, after Mrs. Merkel’s finance minister, Wolfgang Schäuble, warned that Germany, for one, would not approve new financial assistance to help Athens continue to pay its bills through Christmas unless the Greek government fulfilled the conditions of its first bailout.

Prime Minister George A. Papandreou sought to placate European partners on Saturday yet again in a speech. To keep international rescue funds flowing, he vowed to meet tough new austerity targets despite a recession that could cause the Greek economy to contract by as much as 5 percent this year. Demonstrators frustrated with austerity clashed violently outside Parliament as he spoke.

In the midst of it all, Mrs. Merkel is putting on a brave face. In an interview published Sunday in Tagesspiegel, a Berlin newspaper, she urged Germans to be patient with Greece in its current struggle to overcome the debt crisis.

“What hasn’t been done in years cannot be done overnight,” she said. “Remember the reunification process,” she added, a reference to the considerable amount of time it took for East and West Germany to reunite after the fall of the Berlin Wall.

A few weeks earlier, she put on a show of unity at the Élysée Palace in Paris with President Nicolas Sarkozy of France. Giving one another air kisses before a phalanx of cameras, the pair reaffirmed their commitment to the euro and to fixing some of its worst features, including compelling countries to get their finances in better shape.

“Germany and France feel absolutely obliged to strengthen the euro as our common currency and further develop it,” Mrs. Merkel said.

Outside of Greece, some things have improved, if only haltingly. Italy’s lower house of Parliament is expected to approve a tough new fiscal package in coming days.

France, Portugal and Spain are adopting measures to make it easier to balance budgets, moves intended to reassure investors about their commitments to fiscal prudence.

Still, Mrs. Merkel must contend with a stark divide between her support for European unity and a German public that sees no reason, in the majority’s view, to pour good money after bad into the indebted countries of southern Europe. Her Christian Democrat Party has now lost five local elections this year. Yet even as many Germans complain bitterly about their southern neighbors, few in business and politics are ready to let the euro zone fall apart.

After all, if the weakest countries were to revert to their original currencies, a German-dominated euro would soar as investors flocked to it as a haven, devastating the business of exporters who have relied on its stability and relatively affordable level against other major currencies.

Further electoral losses could make it harder for her to get the votes needed to bolster the emergency bailout fund designed to keep the problems that began in Greece from infecting larger countries like Spain and Italy.

That is one thing that investors want to see addressed. A failure by Germany — whose Parliament may now delay a vote — or any other European country to vote for a timely expansion of the fund would deal a serious blow to the confidence of financial markets.

“Given the market volatility, from a German point of view you would think they want to do something about it because it’s affecting their own companies and their exports,” said Martin N. Baily, an economist at the Brookings Institution in Washington and a chairman of the Council of Economic Advisers under former President Bill Clinton.

“It is certainly the kind of thing that will keep you awake at night, and it should give an incentive to Chancellor Merkel” to take greater risks to keep the euro zone from unraveling, he said.

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