September 18, 2012 | Foreign Policy

Das Gift

How Angela Merkel's bold plan to save Europe may have just saved Barack Obama.
September 18, 2012 | Foreign Policy

Das Gift

How Angela Merkel's bold plan to save Europe may have just saved Barack Obama.

Barack Obama had a lot on his hands last week with attacks on U.S. embassies across the Middle East, but in Europe, a big story buried by the drama of firefights in Libya, Cairo riots, and tumult in Tunisia should have him sleeping a bit easier. In fact, he might want to send a thank-you note to Germany's top court, which on Wednesday, Sept. 12, upheld Chancellor Angela Merkel's plan to rescue the euro.

“Germany today is sending again a strong signal to Europe and beyond,” declared Merkel, who Forbes magazine last month called the most powerful woman in the world. The Federal Constitutional Court — Germany's functional equivalent to the U.S. Supreme Court — ruled that Merkel's administration can allocate funds to the European Stability Mechanism (ESM) to help bail out fledgling eurozone countries, as well purchase bonds from Italy and Spain's struggling economies.

Had the German federal court in the southwestern city of Karlsruhe declared the ESM to be unconstitutional, the ruling would have severely jolted the European (and very likely the American) markets. Holger Schmieding, chief economist at Berenberg Bank, termed the decision “another big step towards defusing the euro crisis.”

Merkel's tireless push for the European Stability Mechanism Treaty, under which Germany will contribute 190 billion euros to a 500 billion euro fund to prop up the faltering Italian, Spanish, and Greek economies, should come as welcome news to President Obama, helping to shore up his chances of winning reelection later this fall. At the very least, it won't hurt.

U.S. stock markets were upbeat on the news of the German ruling, with the Dow Jones Industrial Average rising 44 points shortly before the market opened for the day. Major U.S. stock indexes — Dow Jones, S&P 500, and Nasdaq — closed the week with notable gains. Yet the market indexes should be taken with a heavy dose of salt; the Federal Reserve's announcement on Thursday to inject $40 billion in mortgage-backed securities each month over an indefinite period of time surely helped as well.

But at least Obama, Federal Chairman Ben Bernanke, and Treasury Secretary Tim Geithner are putting their (well, your) money where their mouths are. The administration has long warned Germany of the costs of imposing austerity on the rest of Europe. In late July, Geithner cracked the whip like a 19th-century German schoolmaster, warning Merkel to fall in line behind stimulus packages. “If you leave Europe on the edge of the abyss as your source of leverage, your strategy's unlikely to work,” said Geithner, “because you're going to raise the ultimate cost of the crisis … and you're going to … do a lot of damage to the politics of those countries, because the human costs of what's happening not just in Greece but across Europe now are enormously high, and you're seeing that reflected in much more political extremism.”

Geithner could have added that austerity-driven policies would have affected the U.S. economy, and thus, his boss's chances of reelection.

Earlier this week, one observer quipped that European Central Bank (ECB) president Mario Draghi had done more than perhaps the president himself to secure Obama's second term in the White House. Draghi navigated the ECB to green-light purchases of short-term government bonds from indebted countries to rescue their wobbly economies. The Italian banker's move prompted the Deutsche Bundesbank and its powerful head Jens Weidmann to issue an unusually sharp dissent, noting that the ECB's decision was “tantamount to financing governments by printing banknotes.”

For Germans with a salient historical memory of the hyperinflation and largely worthless currency of the Weimar Republic crisis period, Draghi seemed to be laying a foundation for a wave of dangerous inflation. Merkel had spent weeks pushing for Draghi's economic prescriptions (“whatever it takes”) to save the euro, by recapitalizing struggling Spanish banks and putting the Greek economy on life support. And, though the German public may be a bit confused over all this, Merkel — and Obama — got what they wanted.

But Merkel's favor to Obama comes at a strange moment in U.S.-German relations, a moment in which tensions have run higher than usual. The relationship between these two leaders has had its ups and downs. And it didn't start out all that well: In 2008, Merkel remarked through a spokesman that she found it “odd” that then-candidate Obama planned to visit Berlin, and that she had “little sympathy for the Brandenburg Gate being used for electioneering and has expressed her doubts about the idea.”

In the years since that inauspicious beginning, relations between Angie and Barack warmed. But they cooled dramatically in March 2011, when Merkel joined Russia and China at the U.N. Security Council in abstaining from a vote on the U.S.-led resolution to impose a no-fly zone intended to stop Muammar al-Qaddafi's forces from attacking civilians in Libya. The incident marked a low point in relations between the two leaders: Obama shot back at Merkel, declaring that “some nations may be able to turn a blind eye to atrocities in other countries” –– but the United States could not.

A little less than two weeks later, Merkel's Foreign Ministry — led by the pro-business Free Democratic Party politician Guido Westerwelle — frustrated Obama administration officials when it midwifed a deal under which India bought 1.5 billion euros ($2.1 billion) of Iranian crude oil through the Bundesbank. “Treasury is concerned about recent reports that the German government authorized the use of EIH [the European-Iranian trade bank in Hamburg], as a conduit for India's oil payments to Iran,” noted a U.S. Treasury official.

The Bundesbank cooperated with EIH, which the European Union has since included in its sanctions list for facilitating payments to Iran's nuclear program in contravention of Washington's wishes. It may have annoyed the United States, but for Merkel, it was just another domestic political masterstroke: German's foreign and economic ministries — both of which are run by her government's coalition partner, the Free Democrats (whose voting constituencies center around small and mid-size company owners) twisted the arm of the ostensibly independent Bundesbank to transfer the payments to the EIH.

Germany remains Iran's largest EU trade partner, with an annual bi-lateral trade volume hovering around 4 billion euros, and this robust trade relationship has been a source of great irritation for the Bush and Obama administrations. According to WikiLeaks, U.S. diplomatic cable dispatches noted before the Treasury rebuke that “Germany won't sanction German Bank EIH” because “the German business community is very powerful.”

Anyway, it wasn't long before the diplomatic fissures between Washington and Berlin were repaired. A mere two months after the EIH scandal surfaced, Obama awarded Merkel the Presidential Medal of Freedom in a June ceremony at the White House. In his tribute to the physicist turned politician, Obama said that  “Chancellor Merkel has promoted liberty and prosperity in her own country, in Europe, and throughout the world.”

So far, Merkel has had little problem pursuing her interests, with or without Washington's approval. She enjoys high popularity among her citizens, and looks likely to win a third term in the national elections in 2013. An Emnid poll on Sunday, Sept. 16, showed that Merkel secured a 2 point increase and has climbed 12 points ahead of her nearest rival, the Social Democratic Party (SPD). According to the weekly Die Zeit, Merkel's successful crisis management has helped boost her lead in front of the SPD to the largest since the 2009 federal election.

But the German electorate is deeply divided over the wisdom and equity of bailing out feeble southern European economies at its expense. In challenging the ESM bailout based on unconstitutionality, Germans mounted their largest-ever grassroots petition, collecting 37,000 signatures and bringing the measure all the way to the high court.

A poll commissioned by the German press agency DPA and conducted by YouGov days before the court ruling showed 53 percent of Germans oppose the shift of more power to the EU, and 54 percent of those questioned sought a legal review of the ESM and further contributions to the eurozone. Germany's largest daily, the mass-circulation Bild, which has frequently editorialized in favor of expelling Greece from the currency union, headlined the court's decision “Merkel's expensive victory.”

Despite the deep-seated euro skepticism among large swaths of the German electorate, Merkel remains wedded to the common European currency project.

The Berlin daily Der Tagesspiegel and the top German business daily Handelsblatt both said the judges had saved Merkel from an ugly domestic defeat. It shows political toughness on the part of Merkel, but it still bears costs that the chancellor will be forced to assuage the public on. Think of it like this: The court's ruling is like the U.S. Supreme Court's decision in June to uphold Obama's signature piece of domestic health care legislation — the Affordable Care Act, otherwise known as Obamacare. Had Obama lost that decision it would have hurt him politically; but even in winning he still needs to convince the public that it's the right policy.

Germany's federal constitutional court did place some restrictions on Merkel's mobility, however, barring her from reaching further into taxpayer coffers on behalf of weaker EU economies. Chief Justice Andreas Vosskuhle said that “No rule of the treaty must be interpreted in a way which would result in higher payment obligations by Germany, without the consent of the German representative.”

In other words, if Merkel wants to contribute any more than the 190 billion euros that Germany has already budgeted for the latest bailout, she'll need the approval of parliament. But with most parties in the Bundestag lined up behind her, Merkel has political capital to spare, and she has just scored an impressive domestic victory.

The same Merkel who snubbed Obama's campaign efforts four years ago in the German capital may now make a decisive difference in his reelection four years later. If Europe's markets do not go into upheaval over the next several months, sparking a trans-Atlantic economic spillover effect in the United States, Obama might just ride Merkel's coattails to election victory.

Benjamin Weinthal is a Berlin-based fellow at the Foundation for Defense of Democracies and a European affairs correspondent for the Jerusalem Post.