Public anger a hurdle in Europe debt fix

By Henry Chu, Los Angeles Times

Sept. 15, 2011 12 AM PT

Reporting from London — With international pressure intensifying on European leaders, their ability to take more aggressive action to corral an escalating debt crisis is being hamstrung by public opposition to a bigger bailout.

Thursday offered a respite from bad news, as the central banks of Britain, Japan, Switzerland and the U.S. joined with the European Central Bank to grant European banks easier access to cash. The banks have been pummeled by creditors wary of their ability to pay back money because of their exposure to the massive debts of countries such as Greece.

But there was no indication that the move would be more than a short-term balm for the crisis engulfing the Eurozone. Treasury Secretary Timothy Geithner is to make a rare appearance at a meeting of European finance ministers in Poland on Friday, where he is expected to urge his counterparts to follow through on their pledges to provide Greece with a second installment of financial aid that would allow the government to pay its bills.

The rescue package for Greece has been met with hostility from European taxpayers and politicians from Finland to Austria and the Netherlands. But the most serious discontent festers in Germany, the economic engine of Europe and the key to resolving the crisis.

World leaders and the financial markets want Berlin to bring more of its economic might to bear on digging cash-strapped countries out of near-bankruptcy in order to prevent an implosion of the Eurozone. Among the measures being proposed are the creation of “eurobonds,” or debt jointly issued by all 17 countries of the currency-sharing zone.

But the prospect of assuming even greater responsibility for the debts of others horrifies a swath of the German population. Surveys show that about three-quarters of Germans oppose giving another penny to bailing out their debt-ridden neighbors.

That hostility leaves Chancellor Angela Merkel with a dilemma: The world expects her to save the euro currency, the continent’s grand, unifying project. But in Germany the more prevalent mood is: Enough is enough.

In a speech in Frankfurt on Thursday, Merkel acknowledged that her country must be in the vanguard of the hunt for an answer to the financial crisis sweeping the continent.

“The euro provides for economic growth. It provides for jobs and so for prosperity in Germany,” she said. “So it is completely clear that Germany ... has a duty and responsibility to make its contribution to securing the euro’s future and strengthening Europe.”

But she warned against looking for a “thunderbolt” solution that would wipe out problems in a single stroke, an oblique rebuke to those advocating eurobonds, major fiscal harmonization of national economies and other broad proposals.

The seemingly irreconcilable demands on Merkel from German voters and from the rest of the world have left her struggling to find a way forward and her party flailing at the polls.

Her Christian Democrats have lost one high-profile state election after another in recent months, including the state that’s home to her own parliamentary seat. Although domestic issues played a large role in those defeats, unhappiness that some of their hard-earned euros are going to nations they regard as irresponsible has led many Germans to turn their backs on Merkel’s party.

“The ongoing turbulence we’ve seen over the last 18 months is certainly on voters’ minds,” said Joerg Rocholl, president and dean of the European School of Management and Technology in Berlin. “This has played against her.”

At the same time, Merkel is trying to tamp down a revolt brewing within the ranks of her own ruling coalition by increasingly vocal “Euroskeptics,” who reflect the public’s aversion to spending more money on bailouts.

She appeared to be caught off guard this week when Philipp Roesler, her economic minister and the leader of the coalition’s junior party, wrote in a German newspaper that a default by Greece was not out of the question, contradicting Merkel’s oft-stated position that nothing of the sort could happen. Her allies have accused Roesler of trying to capitalize on populist, anti-bailout sentiment in order to prop up his foundering Free Democrats in advance of elections in Berlin.

That fractiousness within her own government has sometimes handcuffed Merkel abroad, to the disappointment of outsiders who expect her to make bold, unilateral decisions on the European stage. A scientist by training and methodical by temperament, Merkel has instead often come off as indecisive and shortsighted.

Merkel’s defenders point out that she can hardly be the leader of Europe if she can’t hold on to her job as leader of Germany.

Ulrike Guerot, a senior policy fellow at the European Council on Foreign Relations in Berlin, is convinced that Merkel is committed to saving the euro and that she is even willing to move toward greater European fiscal harmonization and joint debt. But trying to nudge her compatriots to the same conclusion takes time.

“This woman knows what she’s doing. She just does it not at the pace that the financial markets expect her to do it,” Guerot said. “You first need to get the whole country [used] to the idea that we change to a collective-debt-backed community.”

But many analysts say Merkel has not been forceful enough in impressing upon Germans how dire the situation is and how important it is for their country that the euro survive.

The German economy has benefited immensely from the single currency, whose value has made their exports more competitive than they would have been with the old, expensive deutsche mark. Failure of the euro, or even of Greece by itself, could severely hurt German banks and set back economic growth.

“They have tried to get that message across, but not always in a convincing fashion,” said Henrik Enderlein, associate dean of the Hertie School of Governance in Berlin. “This is a complex issue, and political leaders need to convince the population of what is best.”

Merkel’s immediate battle is to secure passage in the parliament this month of an expanded European rescue fund that would provide the crucial second bailout package to Athens. Eurozone leaders agreed to the fund in July, but it is subject to approval by each nation’s lawmakers.

Rocholl said the expanded fund would almost certainly be approved by the Bundestag. But the problem is that the necessary votes for it might come from opposition parties, not from within Merkel’s coalition.

That would constitute a major humiliation for Germany’s first female chancellor.

“It would signal a major lack of credibility,” Rocholl said. “It’s a nervous and volatile environment at this point.”

[email protected]