Germany has much to lose in eurozone austerity standoff

BERLIN -- The cartoon ballot making the rounds on Greek social networks offers two choices for voters deciding their country's fate in Sunday's elections: A Greek man kisses Angela Merkel's foot in one box, and boots the German chancellor in her behind in the other.

European leaders are increasingly worried over the election's outcome and what it means for the future of the eurozone, the 17 nations that use the euro as their currency. None more so than Germany.

As the largest economy in the eurozone, it would fall on Germans more than any others to pay for future bailouts of nations with shaky finances. And because its economic strength is driven by its export industries, Germany has much to lose if European unemployment rises and standards of living drop.

But Germany's mantra that the solution to Europe's debt crisis is cuts in public benefits and penalties for not doing so is facing increasing rebellion, leaving it more isolated.

"It's like a game of chicken with two drivers heading for a single-lane bridge," said Matthew Lynn, chief executive at Strategy Economics in London. "It would be OK as long as one of them swerves — so either Germany will blink and swerve and relax on the austerity regime, or you'll get a smash-up."

Voters in France in May tossed out Merkel ally Nicolas Sarkozy in favor of a socialist who wants to increase taxes and spending to solve Europe's ills. Greeks may hand power Sunday to a coalition of leftists who have said they will refuse to pay off billions of dollars in loans if Germany does not relent in its demands for spending cuts.

Analysts say a solution to the standoff needs to be found quickly or the eurozone could fall apart, an event that would have repercussions for economies worldwide.

On Wednesday, José Manuel Barroso, president of the EU Commission, defended Europe's response to the crisis but said Europe also needs a plan for the long term, including coordinated budgets and banking regulation, the kinds of things Merkel has been pushing for as a condition of additional German money for bailouts.

Spain's prime minister, Mariano Rajoy, on Wednesday also called for greater European fiscal and banking integration to prevent governments from overspending. But he also called for measures to help financially weakened states that Germans have resisted, such as making all eurozone nations share in the debt of hobbled nations and guarantee their bank deposits.

Spain on Sunday was the fourth eurozone country to be forced to accept bailout money. Ireland, Greece and Portugal have already done the same. Spain needed it for banks that were at risk of going under due to a real estate crash, as did Ireland. Greece and Portugal overspent on public projects, benefits and jobs.

Pressure has been rising on Germany to keep the money taps flowing. But after several refusals to soften its stance, such as earlier this month when it stopped a European initiative to create a eurozone-wide banking union that would give shaky banks access to funds in healthy ones, Germany is signaling it might be open to more EU supervision of independent private banks.

But in return it continues to demand the eurozone bureaucracy in Brussels be handed more power to control the spending of individual nations, or what German Finance Minister Wolfgang Schaeuble calls "fiscal union." Merkel is increasingly speaking of "more Europe" as a solution.

Still, the tendency of prudent Germany to finger-wag at its profligate neighbors has spawned a backlash among Europeans whose longstanding resentment of German dominance is never far from boiling over.

"It doesn't help a country that's already suffering and knows that it has to find ways out of a rather difficult and dangerous situation to hear, 'Well, you got it wrong,' " said Almut Moeller, a policy analyst at the German Council on Foreign Relations in Berlin.

The message from Berlin appears to be the same: Europe has a spending problem, not a tax problem, and cutting costs is the answer. Germany has forked over $250 billion in the past two years to its debt-ridden European Union partners, far more than any other nation. But the beneficiaries of the largesse resent spending controls attached to the money. In Greece, Merkel is often depicted in Nazi regalia on the front pages of major newspapers.

Anti-austerity politicians who rail against German demands have won a string of victories in Greece, France, Italy and elsewhere. Germans have reacted by trying to explain themselves in a more solicitous manner.

"We have to help shape tomorrow's Europe," said German Foreign Minister Guido Westerwelle when he unveiled a campaign to sweeten the country's image. "At the same time, we have to convince people in Germany, Europe and beyond that we are on the right path."

Suspicions hard to overcome

Some experts say Germany's tactic assumes, perhaps incorrectly, that populations used to cushy government benefits, early retirements and lifetime public jobs are willing to listen to "Achtung" wrapped in pastry.

"If you have your foreign ministry working on plans to make you better understood, you clearly are in a hole," said Ben Tonra, professor of European politics at University College in Dublin.

And it's not easy to overcome the lingering suspicion among many Europeans of a Germany bent on conquering Europe through exports the way it once did with its armies.

"There is a growing sense that Germany has specific interests, that it wants to defend those interests, and that it looks for means and ways to do that," said Moeller. "(That) might for other countries be a very obvious thing to do but for this country has always been a bit of a struggle."

In recent years Germany has played the role of the good European, allowing France and others to speak for the continent on political and economic matters. Part of this subservience resulted from the shame of having devastated the continent in two world wars, and the early promoters of a European Union saw the project as a way to prevent Germany from again asserting its traditional dominance militarily.

"It was a kind of quid pro quo for Germany's integration into the whole European context and also the Western alliance," Moeller said. "(But recently), there have been clichés, unprecedented clichés, thrown around on both sides: What it shows is that the history of this continent is coming back now, and it's still influencing perceptions now after decades."

But while Europeans continue to throw Germany's past in its face in the bailout debate, Germans themselves are increasingly distanced from the war-guilt of older generations and feel no need to kowtow because of military campaigns and atrocities long before their time, say analysts.

"I don't think Germany should have to explain itself, really," said Angela Pretorins, a 32-year-old commercial aviation agent in Berlin. "The support it's giving should be enough."

Merkel's real challenge, some observers say, is to explain to her own people how important the EU is to German prosperity and not lecture about the "laziness" of southern Europeans. Forty percent of Germany's exports go to consumers in the European Union, a market that could dry up if European incomes fall further or if the euro collapsed.

"This government has to learn that whatever is being said in Germany these days, even if it's being said for a domestic audience, is being heard abroad," said Moeller. "(Germany) is actually quite clumsy with itself."

Germans don't appear to feel that the matter warrants much discussion. At a recent town-hall-style discussion with about 100 citizens from across Germany, Merkel fielded questions about the future of their country. During the hour-long discussion citizens brought up education, child care and other issues. None asked about the eurocrisis.

Some, like the director of the think tank Open Europe, Mats Persson, say that's because Merkel is trusted to handle the situation to the satisfaction of most Germans. Others say it is a recognition that Germany can't save Europe from itself.

"The core of the problem is that the euro just doesn't work — it's a dysfunctional currency that was badly constructed," Lynn said.

"A dysfunctional currency is like a dysfunctional family — it's bad for everybody."