Favoring the deutsche mark
The politics of this crisis have taken a decided turn for the worse in the country that effectively holds the veto power right now -- Germany.
A June poll for ARD public television showed that 55% of Germans want the deutsche mark back. That's up 9 percentage points since the May survey in this poll.
I find two things disturbing about this poll.
First, despite significant evidence showing that the German economy derives a considerable benefit from pricing exports using a weaker euro rather than a stronger deutsche mark, a majority of Germans want their old currency back. In the same survey, 56% of Germans say they're worried about their savings. Weighing the advantages of the euro against the potential threat from the single currency, a majority have decided that the threat outweighs the advantages.
Second, the deteriorating politics of the "austerity countries" and their need to ask for either more time or more bailout funding plays into an increase in political sentiment against the euro and in favor of the deutsche mark.
The debate over the Greek request for more time and better terms, even if the Greek plan is shot down (and I expect it will be), feeds right into the political narrative in Germany. A significant number of German voters, evidence or no evidence, see the southern European countries as the home of lazy freeloaders who don't work very hard (and then retire at 45).
Problems deepen with recession
Even German voters who don't feel this way are likely to be dismayed when Greece, Portugal, Spain, France and Italy all miss their budget deficit targets this year. And that is all but inevitable, since the eurozone countries are all in or sinking toward recession. Slower economic growth means budget cuts and tax increases made to date won't reduce budget deficits as much as projected, because tax revenues sink with slowing economic growth. If Germans have euro bailout fatigue now, think of the politics as this crisis drags on into 2013 and beyond. (And 2013 is an election year in Germany.)
Germans are already justifiably worried about the dangers of throwing good money after bad. If the austerity economies are going to go under anyway, the logic goes, wouldn't it be better to let them go now rather than after Germany has sent them billions more euros? I sense growing support for the not-so-easily refuted argument that it would be better to spend limited resources on an orderly wind-down of the euro than to put billions more into rescue plans that are doomed -- and will leave Germany on the hook for further payments for dissolving the eurozone.
Eroding German support for the euro wouldn't matter quite so much if Germany weren't key to any solution, and if important German institutions weren't opposed to the aggressive moves that are needed to save the euro. But Germany has the financial firepower to make the difference in the crisis.
The Bundesbank, Germany's central bank, has opposed actions including the purchase of Italian and Spanish debt in the secondary markets, the European Central Bank's decision to open a huge lending facility for European banks, and recent suggestions to use that European Financial Stability Facility to directly capitalize Spanish banks.
Politicians in the opposition, but also and more critically, inside Chancellor Angela Merkel's own coalition, have succeeded in delaying Germany's vote for the European Stability Mechanism, the permanent European bailout fund. Facing elections in 2013 and coming off a series of defeats in state elections, Merkel sounds increasingly as if she fears sentiment among German voters could quite easily turn against her.
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