Voters Punish Merkel Over Greek Debt

It would be inaccurate to say that German Chancellor Angela Merkel lost an important state election this weekend due solely to her reluctant support of the EU-sponsored rescue package. However, it would also be inaccurate to say that it did not play a significant part in the election result. What is of real importance however is that in the end, the new reality for Merkel is that her government has lost its majority in the upper house of Parliament. This will make it considerably more difficult for the government to implement its planned policies.

To be fair to Merkel, her government was blind-sided by the Greek credit predicament over which it had little control. However, it was the manner in which Merkel managed the crisis that opens the door to criticism.

Initially, the threat of credit default was thought to be contained to Greece alone. Unfortunately, once the situation appeared ready to spill over to other weak economies within the Euro Zone as the likelihood of debt contagion grew, there was no choice left but to pledge direct financial support to prevent a complete currency meltdown.

If Merkel did make a mistake in how she handled the crisis, in was in that she allowed herself to be seen as being unable – or more likely perhaps, unwilling – to make a decision. When the crisis first hit the news, Merkel was resistant to committing funds to a package for Greece. Given the unpopularity with many Germans who felt that Greece was the architect of its own demise and was for years, living beyond its means, this could be seen as a natural course of action for a government eager to retain voter approval.

As the crisis worsened however with the prospect of other European countries being dragged down with Greece, it became obvious that Germany would have to take the lead on creating a plan to save Greece. Added pressure came in the form of a rapidly depreciating euro and billions being wiped out in global stock markets, yet Merkel refused to take a strong stand supporting Greece. This added further to the market chaos and could certainly have been largely avoided if Merkel had acted with greater alacrity and a clear message of support.

Underneath it all, I believe that Merkel knew there could only be one outcome. With Greece’s May 19th debt repayment looming on the horizon, the EU could not allow Greece to fail, and as far as I am concerned, there was never any question that a bail-out would be necessary. In my view, Merkel did a poor job of explaining to her fellow citizens that saving Greece was ultimately in the best interests of Germany and the European Union. Instead, the government allowed itself to be seen as making it up as it went along.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.