[Skip to Content]

Register to receive the OMFIF Daily Update and trial the OMFIF membership dashboard for a month.

* Required Fields

Member Area Login

Forgotten Password?

Forgotten password

Analysis
Spanish bail-out, boost for French Left weaken Merkel

Spanish bail-out, boost for French Left weaken Merkel

Hollande’s strength complicates EMU manoeuvring
Greece’s Syriza says Spanish deal strengthens negotiating hand

by David Marsh

Mon 11 Jun 2012

The strong showing for the French Left in the first round of yesterday’s French parliamentary elections, combined with the bail-out for Spanish banks outlined on Saturday, will encourage politicians and voters to call for a lessening of European austerity in next weekend’s elections in Greece.

Yesterday’s poll, likely to lead to a parliamentary majority for Socialist president François Hollande in the second round of the French elections on 17 June, reinforces Hollande’s European position, threatening to downgrade German Chancellor Merkel’s hitherto pivotal role.

This is likely to complicate further wrangling over the future of economic and monetary union (EMU) as a complex series of manoeuvres gets under way to try to resolve near-intractable difficulties in Europe’s under-performing economies. Alex Tsipras, leader of Greece’s left-wing Syriza party which some believe will emerge in front in Greece’s re-run elections on 17 June, said at the weekend that the Spanish rescue deal strengthened his negotiating hand against ‘catastrophic and completely ineffectual’ austerity. However, if she gives too much ground, Merkel faces a potentially disastrous backlash against her policies in Germany, the main European paymaster.

Spain’s move to borrow an estimated €100bn to shore up its banking system, sealed in a telephone conference of euro finance ministers on 9 June, is welcome, but not sufficient to bring calm to the euro area. It was the minimum necessary to place a buffer between banking problems in Greece and Spain and protect EMU against a possible euro departure by Greece at some point after the 17 June Greek elections. The only light conditionality likely to be applied to the deal – in contrast to tight inspection of economies for the previous rescues for Greece, Ireland and Portugal – will be criticised by government opponents in Germany as showing that Merkel has lost her grip on European politics.

By pulling up a drawbridge between Athens and Madrid to shield the Spanish economy from possible adverse reaction to an unfavourable election outcome next weekend, the Spanish bail-out will make European politicians somewhat more relaxed about a Greek exit.

Germany has been pressing Spain to tap Europe’s rescue mechanisms because it wishes to ring-fence Greece’s specific problems and make creditor countries less susceptible to pressure from Athens for more cash.

The Spanish government’s apparent success in achieving an accord on the bail-out without full-scale austerity conditions will strengthen the hand of Athens politicians who wish Greece to remain in the euro but renege on its debts. The vote of confidence for President Hollande, just one month after he defeated Nicolas Sarkozy in the French presidential election, will increase pressure on Merkel to soften German insistence on further austerity as the key to shoring up the euro area.

Merkel already faces a troublesome domestic coalition of resistance to her euro policies in her own centre-right government and from the Social Democrat opposition. Just at this acutely difficult moment, she is confronted by a new French president wielding increasingly attractive euro policies that are diametrically opposite to Berlin’s.

Having met for the first time less than a month ago, on 15 May, Merkel and Hollande have to paper over deep cracks. Merkel took a deliberate decision to cold-shoulder Holland in the run-up to the 6 May French presidential poll, publicly backing Sarkozy, refusing to meet Hollande when he visited Berlin earlier on, and dispatching the general secretary of her Christian Democrat party to France to denounce Hollande’s policies – even though he was the clear favourite to win the election.

Merkel will now find it ever harder to maintain opposition to mutualised borrowing through Eurobonds, more assertive euro-supporting action by the European Central Bank, softer terms for countries borrowing from the rescue funds and more government borrowing to get economies moving.

At a seminal moment in the history of the euro, France and Germany are pointing in different directions – and Berlin is looking increasingly rudderless. Even German officials close to the Berlin government say that Merkel has appeared to be floundering and been badly let down by her advisers in recent months. One key person in Franco-German relations says that Germany ‘has no captain’.

Tell a friend View this page in PDF format