Debt Crisis Woes Merkel's Reputation on the Decline in Europe

Everyone is talking about German Chancellor Angela Merkel these days -- and most of what they have to say isn't complimentary. Her plan to create a bankruptcy mechanism for euro-zone countries, they say, has worsened the debt crisis in Ireland and elsewhere. Merkel's name, once widely respected, is now mud. 
German Chancellor Angela Merkel, say many, has made Ireland's debt crisis worse.

German Chancellor Angela Merkel, say many, has made Ireland's debt crisis worse.


It wasn't all that long ago that Germany's chancellor was the star of Europe -- a consensus builder who had positioned herself at the vanguard of the effort to save the world from global warming. Indeed, it looked for a time as if Merkel was on the way to becoming a European politician as widely respected as Helmut Kohl was in his time.

Now, though, Merkel's eventual legacy seems to be more unclear than ever. Ever since the sovereign debt crisis began shaking the euro zone, Germany has been the target of criticism more frequently than it has in a long time. And the image of the chancellor has been badly blemished. European papers these days are full Merkel, looking tight-lipped and severe.

In the middle of Europe's crisis, the former image of the ugly German -- all-powerful and arrogant -- has returned. Groaning under the weight of the euro crisis, Ireland sees itself as a victim of German conceit. The Irish press writes of "neo-colonialism." One of the largest newspapers in the country, the Irish Independent, quotes Fine Gael politician Michael Noonan, saying: "Can I ask whether this is what the men of 1916 died for: a bailout from the German chancellor with a few shillings of sympathy from the British chancellor on the side?"

'That Does Worry Me'

Germany, and Merkel, are undergoing a stress-test. The president of the Euro Group, Luxembourg Prime Minister Jean-Claude Juncker, has hinted at his own concern about Germany's European policies, without naming the chancellor directly. "That in Germany federal and local authorities are slowly losing sight of European public good, that does worry me," he told the newspaper Rheinischer Merkur.

The Vice President of the European Parliament Silvana Koch-Mehrin, a member of Germany's business-friendly Free Democrats, told SPIEGEL ONLINE: "At the moment Merkel is being watched in Europe. People expect a lot from her, but are also unsparing in their critique. Almost every speaker in the European Parliament has mentioned Germany in recent weeks -- that is something we haven't seen for a long time."

The German chancellor finds herself in a difficult spot. The country gave up its beloved and stable deutschmark for the euro; now Berlin is demanding far-reaching austerity measures in Ireland, as it did in the case of Greece last spring. Such demands are far from popular in the countries in question.

They are particularly unpopular because many in the countries now suffering most in the debt crisis accuse Merkel of being partially responsible for having made things worse. In the middle of October, she and French President Nicolas Sarkozy announced plans for the creation of a bankruptcy mechanism for euro-zone countries -- a debt restructuring proposal which foresees private investors also taking a hit should a country no longer be able to pay its debts. The idea is for such a mechanism to take hold once the current €750 billion euro backstop expires in 2013.

Vastly More Expensive

But ever since then that announcement, interest rates on sovereign bonds from heavily-indebted countries like Greece, Ireland, Spain and Portugal have skyrocketed, making it vastly more expensive for them to borrow money on financial markets -- and to service their debts.

As a result, frustration is extreme. "Merkel Has Triggered Rising Risk Premiums," read a recent headline in Portugal's largest daily Jornal de Notícias. The influential Spanish daily El País wrote about "the clumsiness of Europe's leaders." The article claimed that German unintentionally made things much worse for Ireland by demanding that private investors be held partially liable for losses. "Perhaps it's not a bad idea -- but why announce it first?" asked one particularly bewildered commentator.

Merkel's objective to make private-sector holders of sovereign bonds share the cost if that state became insolvent is intended to show her determination to rebalance an out-of-balance system. Many German taxpayers have been wondering why they should have to foot the entire bill for a mess in which the banks were also heavily involved. "Politicians have the say, not business," Merkel told the Bundestag.

That sounds courageous. The only problem is, Merkel's plans for a future permanent crisis mechanism have already made the financial markets extremely nervous today. A plan set to come into force three years from now is currently causing nervous investors to overreact.

'Lack of a Unified Message'

Experts in the financial industry are not very impressed with the Germans at the moment. The German business daily Handelsblatt writes about a "Merkel premium." "The debate about a debt restructuring mechanism is coming at the wrong time," wrote Angel Ubide, chief economist at Tudor Investment Corporation, in an editorial for the newspaper. In a separate op-ed, the chief economist at Barclays Capital, Julian Callow, predicted that if smaller EU countries were to follow the German example, they would be unable to find buyers for their bonds, and would end up being unable to repay their maturing debts.

The focus of the public criticism is on Merkel's communication strategy during the crisis. This week, for example, she first made some comments to the parliamentary group of her conservative Christian Democrats in a closed-door session, then she uttered a few sentences about the euro in a speech to the employers' federation. Finally she talked about the issue during a Bundestag debate on the budget.

Observers complain that the chancellor is not providing a complete picture. "Right now, if you want to know Merkel's stance on the euro crisis, you practically have to piece it together," said Koch-Mehrin. There is a lack of a definitive, unified message, she said.

Koch-Mehrin made her own suggestion for how Merkel could improve her PR approach. "I would like the chancellor to hold a major speech to the nation on the euro crisis and the future of Europe -- preferably on prime-time television."