Merkel’s Current Headaches
If Chancellor Angela Merkel could decide who should run Italy and Spain, she would have little doubt about whom to choose: Mario Monti and Mariano Rajoy, the current prime ministers of Italy and Spain, respectively.
What Merkel needs in 2013, first and foremost, is continuity. As she approaches her own election challenge in late September, she wants to reassure German voters that things remain under control with her at the helm of Germany. In order to achieve this goal, things need to stay relatively calm on the European front. Despite her solid showing in all polls, Merkel’s position is still fragile.
For instance, domestic energy prices are climbing, both for companies and consumers, as a result of Merkel’s reforms of the energy sector and the decision to abruptly abandon nuclear power in Germany. Higher electricity bills could dent consumer sentiment and have a negative impact on the German economy. Merkel’s government is scrambling to find an answer. In a sign of how serious things could get, the government is even trying to enforce price controls.
However, the biggest dangers to Merkel are to be found abroad. Spanish Prime Minister Rajoy could be swept from power by a corruption scandal and Mario Monti’s political career could be seriously jeopardized by a banking scandal at the oldest Italian financial institution, Monte dei Paschi di Siena. Monti was hoping for a strong showing in the upcoming Italian election on February 24th and 25th, but his government’s role in rescuing the bank could undermine his plans.
Both leaders, Rajoy and Monti, met with Chancellor Merkel in recent days. She was full of praise for both of them, admitting publicly that the Italian prime minister is a tough negotiator when it comes to defending the national interests of his country—Italian media made sure to highlight Merkel’s words. They were meant as a rebuff to Prime Minister Silvio Berlusconi’s criticism of Monti’s supposed pro-German stance.
Berlusconi’s nationalistic populism is shaking up the campaign. His style has contributed to very animated and increasingly offensive exchanges. Many observers find it impossible to imagine that any of the main actors involved—Monti, Berlusconi, and the leader of the left Pierluigi Bersani—could potentially be forced to work together after election day. Both Bersani and Berlusconi have assailed Monti in recent weeks, almost as if he was a usurper, because he dared to question the unwritten rule that only allows Berlusconi’s center right alliance and the left to fight for Italy’spolitical power. As a consequence of the raucous campaign, some international media have started to paint Italy’s near future as that of an ungovernable country. This interpretation rests on what many see as the increasing likelihood that the election will produce a hung parliament.
Germany is watching very carefully what is happening in Rome. Following a long lull in activity, even markets seem to have recognized that the euro zone is not quite out of the woods yet after all. Political risk, still the biggest challenge for the common currency area, appears to be back.
But how big are the Spanish and Italian risks? Let’s start with Spain. Even if Rajoy were ousted from power, which only appears to be a distant possibility, that would not mean that the country would be forced to go to the polls. The more likely scenario would be for King Juan Carlos to appoint a new prime minister from Rajoy’s party, the conservative Popular Party (PP). Spain’s main problem remains the dire state of its economy, with recent political worries appearing to be overblown.
Italy is more complicated. But even in this case, the only real risk seems to be a return to power by Berlusconi. That would be an impressive comeback indeed, and it could potentially put a lot of strain on Europe given his openly anti-German stance. However, there is only so far Berlusconi could go. Italy would quickly find itself completely isolated. France would abandon its attempts to act as a bridge between debtor and creditor nations within Europe. Berlusconi would decisively push French President Hollande into Merkel’s arms. In the end, markets would punish Italy, and Berlusconi, who is unable to sustain such an unequal fight, would abandon his more extreme positions. He will not risk a euro exit for Italy despite all his current testosterone laden talk. He is a powerful salesperson, not a kamikaze.
If Bersani wins, Italy will largely stick to Monti’s current program of austerity and timid structural reforms. The influence of more leftist elements and trade unions would make itself felt and prevent him from decisively addressing Italy’s lack of competitiveness. Both Bersani and Berlusconi don’t believe in bolder reforms, especially if they have an Anglo-Saxon taste. On the contrary, both men believe in the return to a slightly corrected status quo.
With any hope of Monti winning the election quickly fading, is Italy condemned to wither? Not necessarily. A clean Monti win was really never in the cards—even he does not really believe it. Monti’s plan from the very beginning was to have a strong enough showing at the polls that would enable him to pull both left and right towards his economic agenda. In the case of a hung parliament, he would have achieved his goal. He could become the arbiter of Italy’s political future.
Merkel will likely do anything she can to help both of her troubled allies. She could stage a tough enough fight at the EU budget summit later this week and then symbolically relent to Italy’s pressure. A victory in Brussels, even if achieved against some German resistance, would help Monti domestically, at least to some degree.
For Merkel to successfully implement her own domestic political plans, she needs Italy and Spain to stay away from the limelight as much as they can. She can only hope that the current political turbulences will be over soon.