The true personal price of the Eurozone disaster was read out to Angela Merkel overnight as her and her party got wiped out in the election in her very own state:
German Chancellor Angela Merkel’s party suffered its fifth election loss this year after she failed to sway voters in her home state with a campaign based on her handling of the euro-area debt crisis.
The Social Democrats, the main opposition party nationally, took 35.7 percent to win yesterday’s election in Mecklenburg- Western Pomerania, preliminary results show. Merkel’s Christian Democratic Union had 23.1 percent, its worst tally since voting began in the state in 1990 after reunification that year between West Germany and the former communist East Germany.
The result in the eastern state where Merkel’s election district is located means her national coalition has been defeated or lost votes in all six German state elections so far this year as voters resist her bid to prevent a euro-region breakup by putting more taxpayer money on the line for bailouts.
This triggered an equity sell-off across Europe as the reality struck that it may now be politically impossible for Germany to continue to support the European economies in their current form. It is possible however, that last nights performance was just the dress rehearsal. On Wednesday the German high court delivers its verdict on the original Greek bailout and, although I may need to re-assess after last night, I am not sure the European markets have priced in the likely outcome:
On Wednesday, eight German Federal Constitutional Court judges will announce their ruling on whether the German contributions to the first Greek bailout in 2010 and to the euro rescue fund were lawful, following a legal challenge brought last year. But they already made up their minds some time ago. Ever since the public hearing on the case in July, it is seen as certain that they will demand that the German parliament be substantially involved in all further rescue operations.
If that turns out to be the case, and any changes to the EFSF need to go through the German parliament to be ratified, then the failing election results of Merkel’s party are going to have a far greater effect on European economics in the near future. Interestingly, the German Finance minister is against a decision to include the German Parliament in decision making, stating that it would make the mechanism too slow to response in a crisis. But given his recent posting via FT.com it would seem that even if it was left to him alone to make the decisions for Germany the outcome would be exactly the same. From the man himself:
Governments in and beyond the eurozone need not just to commit to fiscal consolidation and improved competitiveness – they need to start delivering on these now.The recipe is as simple as it is hard to implement in practice: western democracies and other countries faced with high levels of debt and deficits need to cut expenditures, increase revenues and remove the structural hindrances in their economies, however politically painful. Some progress has already been achieved in this respect, but more needs to be done. Only this course of action can lead to sustainable growth as opposed to short-term volatile bursts or long-term economic decline.There is some concern that fiscal consolidation, a smaller public sector and more flexible labour markets could undermine demand in these countries in the short term. I am not convinced that this is a foregone conclusion, but even if it were, there is a trade-off between short-term pain and long-term gain. An increase in consumer and investor confidence and a shortening of unemployment lines will in the medium term cancel out any short-term dip in consumption.These efforts will inevitably bear fruit, but it will not come overnight. This time, we will have to take the longer view. For too long we have forsaken long-term gains for short-term gratification with the result we all know.
Italian economic growth is likely to fall short of the government’s official forecast of 1.1 percent in 2011 and 1.3 percent in 2012, probably coming in under 1 percent, a senior government source said on Monday.