Role of Merkel

11th May, 2006

The next few years in Europe’s will be Germany’s.

Under a hugely confident leader, Angela Merkel, backed by a coalition with an overwhelming majority and finally shedding its post-Second-World-War angst, it is set to take its place as the nation of Europe which is economically strongest, most heavily populated and pivotally situated at the confluence of east and west.

As a result, Berlin will be the heart of the European Union, no longer overshadowed politically by a weakened France.

Growth

Despite a long period of gloom and policy fumbling, and some continuing hic-cups such as the fall in industrial production in March, German business confidence is now at its highest since 1991, according to the latest survey by the Institute for Economic Research. Consumer confidence has hit a five-year high.

Nearly 60 per cent of Germans believe the new government will raise economic growth.?

Still, there are problems. The coalition has yet to make the bold choices needed to tackle the deficit and structural problems.

Unemployment is running at more than 9 per cent. Merkel has said it will not decline soon - maybe to prepare for the imposition of tough policies.

Annual growth is likely to stick at a sluggish 2.2 per cent a year, though economists are at last revising projections upwards.

Russia

Though the economy will ultimately underpin Germany’s status, the Chancellor also gains major authority from her position between a chastened President Bush in need of friends and a President Putin who wants economic support – Germany is Russia’s biggest trading partner.

Her predecessor, Gerhard Schröder, had no influence in Washington thanks to his crude Bush-bashing, and little in Moscow thanks to his uncritical cosying up to Putin.

Germany’s new policy of drawing back from Russia is winning Merkel friends in eastern Europe, which deeply distrusted the Berlin-Moscow Alliance and is much more open to free-market reform than Russia – particularly in the Czech and Slovak Republics and Poland.

Europe

In Europe, Merkel has no serious rival at a time when the EU Constitution in tatters, and the continent is seeking a way forward.

France’s domestic politics are riven by destructive allegations of scandal; the Chirac administration has lost all authority; the economy is in the doldrums. Spain’s Jose Luis Zapatero is seen as a weak leader.

Britain’s semi-detached stance on Europe, coupled with the perception of Tony Blair’s as unwaveringly devoted to Washington, places it outside the mainstream.

Italian power was always subordinate to the Paris-Berlin axis, and the advent of a weak left-of-centre government under Romano Prodi means that Rome is likely to follow the German lead - it remains earlywarning’s belief that, sooner or later, a more centrist Italian government will come into being, possibly still under Prodi, marginalising the Communists and driving the right further into opposition.

Euro-zone

Modest German-led growth in Europe is unlikely to paper over fundamental problems which both the European Union and national leaders have preferred to duck.

The principal one lies in the process of integration of new member states, which, while not entirely stalled, lacks any sense of direction now that the Constitution is dead.

The EU’s cumbersome decision-making process has been quietly streamlined by sneaking in parts of the Constitution. But the institutional framework for the ambitious free-market programme of the Commission President is absent.

That is linked to the euro-zone’s straitjacket on budget deficits and the highly constrictive interest-rate policy policed by the European Central Bank. While attracting international respect for the new currency, this seems to be stifling some European economies; a more flexible approach on the lines taken by the US Federal Reserve or the Bank of England may be required.

Challenges

There is also the worry of growing popular disillusion at the perceived remoteness of decision-making in Brussels and the impotence of national governments. This has been evident in lower voter turnout across the continent, in the French and Ditch rejections of the Constitution, in support for far-right-wing parties, and in growing euro-scepticism in some countries.

Germany will take on the EU’s rotating presidency in the first half of 2007, but Merkel says the time is not ripe to try to salvage the Constitution. With that plan dead, Europe’s ambition to unify its foreign policy voice is stalled as governments speak from embarrassingly different scripts.

Finally, the twin tests of an assimilation of the large Moslem population of Europe and of continuing immigration are causing a Europe-wide backlash. Common strands can be drawn between the French ghetto riots last autumn, bombings in London, disturbances in Holland, the 2004 Madrid attack and growing resentment among the big North African population in Italy.

None of these problems is insuperable. But it will be Merkel – perhaps joined next year by Nicolas Sarkozy as Chirac’s successor – who will face the challenge not just of skilfully negotiating between east and west and reviving her country’s economy, but also of giving the continent direction and purpose to re-engage the public in a manner that is now conspicuously lacking.