Germany's big worry: China, not Greece

By Michael Stott

BERLIN | Wed Sep 19, 2012 1:18am EDT

(Reuters) - Berlin, not Brussels, will decide the future of the ailing eurozone because Germany's economic power and its status as the European Union's main paymaster give it an effective veto over key decisions.

So it comes as a surprise to find that in Berlin's corridors of power, the main worry is not whether Greece sticks to its reform pledges or Spain demands an EU bailout.

As the world's third largest exporting nation, Germans are far more concerned about whether China loses its appetite for their machine tools and cars, or about what the famed Teutonic manufacturers should make in the year 2030.

Dominating the stage in Germany is the towering political presence of Chancellor Angela Merkel. Just over a year before federal elections, she looks unbeatable.

Opinion polls show her CDU/CSU party winning between 35-39 percent, well ahead of the next biggest grouping, the opposition Social Democrats on 26-30 percent. The opposition Greens are in third place on 12-15 percent, with three smaller parties splitting the remainder.

Coalitions are the norm in Germany so it is mathematically possible to imagine a combination of parties which could unseat the Chancellor next year. But few people expect this. "Quite honestly I don't see any risks for Merkel inside Germany," one senior opposition politician commented. "She is very strong and highly trusted by the population as a crisis manager."

Ranked by Forbes as the world's most powerful woman, Merkel has ruled since 2005 through a canny mixture of political maneuvering, ruthlessness, determination and a good feel for the concerns of the ordinary German.

Her reluctance to embrace bold, comprehensive solutions to the eurozone crisis from the outset has exasperated some foreign critics. But at home, it chimes well with the national predilection for cautiousness, deliberation, thrift and hard work.

"Southern European countries face a situation like the one I had at school," said one senior government official. "I went to a good school and unfortunately I found that other students were cleverer than me in certain subjects, so I had to work harder. I could have gone to a different school but I wanted to stay at that school, so I worked harder."

TO THE BRINK

Merkel took the eurozone close to the brink earlier this year by blocking proposals for European governments to jointly guarantee government borrowing and bank deposits. But she calmed markets in recent weeks by dropping her opposition to the European Central Bank buying the debt of vulnerable southern European governments to lower borrowing costs, provided those nations agree to reform their economies.

"What we're now saying is that if you're drowning, we'll throw you a lifebelt but we'll only pull you out of the water if you start to make visible swimming movements," said Michael Naumann, a former SPD minister, publisher and editor.

Such "conditional solidarity" with Germany's neighbors appeals to a public who are suspicious of the final bill for a eurozone rescue. Germans do not want their hard-fought economic prowess jeopardized by what they regard as irresponsible, free-spending neighbors who failed to embrace necessary economic reform as Germany did earlier this century.

"The key to Merkel's success is the way she portrays herself as the defender of the German taxpayer, only reluctantly going along with Eurozone rescue deals and doing so at the last minute under duress," said one ambassador in Berlin.

While other European countries still debate whether Greece should be allowed to stay in the eurozone after failing to meet targets to cut public spending, privatize state assets and open up its economy, officials in Berlin say Germany has already quietly decided to let Athens remain.

"Chancellor Merkel was much more interested in throwing Greece out six months ago, but not now, even though their credibility is close to zero", one official said. "If you want to know why, look at North Africa and the eastern Mediterranean. With all that's going on there, who wants a NATO member on the southeastern border of the EU to turn into a failed state ?"

EUROPE FIRST

In any case, there is little political opposition to Merkel's Europe policy in a country where strong pro-Europeanism is an article of political faith. "I can't imagine that a coalition between the SPD (Social Democrats) and the Greens would actually do anything differently to her," said a second ambassador. "All the main parties support her strategy."

That includes the German Greens. Foreign observers who remember the unkempt, anti-establishment Bonn radicals of the 1980s may be surprised to meet today's sharp-suited, smooth-talking Green leadership, who project a keen interest in power, rather than protest.

The radical baton has instead passed to Die Linke, the successors to the East German Communist Party and Germany's hardest left. "Mrs Merkel is so popular because with the exception of Die Linke, there are practically no alternatives to her," said Sahra Wagenknecht, the elegantly attired deputy leader of the party, who bears more than a passing resemblance to German revolutionary Rosa Luxemburg.

"The SPD runs faithfully after her and nods through her ideas...Merkel's Europe policy is not questioned at all by anyone apart from us."

Wagenknecht opposes the eurozone bailout because she says it has benefited bankers and the rich disproportionately and hurt the poor and the unemployed. But her party bumps along at around four percent in polls, a result she blames on a prolonged bout of in-fighting. Others say Germany is simply too prosperous for a hard-left party to flourish.

Senior Social Democrats have a different problem: Merkel keeps adopting their best ideas.

"She has stolen practically 80 percent of our political program," muttered one well-connected SPD supporter, noting Merkel's abrupt U-turn last year announcing an end to nuclear power. "She has no ideas or principles of her own and is only interested in power. She is destroying party politics in this country."

With so much consensus among the country's political elite over the need for Germany to rescue less fortunate members of the eurozone, the harshest criticism of Merkel's policy on Europe has come from outside parliament: the conservative media, members of the public and the country's revered central bank, the Bundesbank.

Moritz Schuller, who edits the opinion page for the capital's daily newspaper Der Tagesspiegel, is among those critical voices. "We are following an ideological project," he said. "We sold the Greeks Mercedes cars and Bosch fridges which they bought with money they didn't have."

"Now we are making the same mistakes with Greece that we made with East Germany during unification. We are pouring money into a system which doesn't function."

"East Germany didn't become an economic powerhouse because of our ‘Marshall Plan'. People left and went west in search of jobs instead. Compare that with Poland: they succeeded because they had 10 years of pain where they let companies go bust and joblessness rise, while they restructured."

Outside Germany, the most commonly heard complaint about the Chancellor is a different one: Merkel is too cautious and hesitant in her moves to solve the Eurozone crisis. "Why can't she show more leadership ?" is a cry often heard in southern Europe or Brussels.

Viewed from Berlin, things look different.

"Translate ‘leadership' into German and what do you get ?" asked one senior politician here. "Fuehrung. People round here have learned that you have to be careful with Fuehrers".

The biggest risk on the horizon for Merkel is economic, rather than political. Germany's economy is slowing down and the OECD predicts it faces a mild recession. Again, though, nobody expects a tough economic climate unless China catches a cold or another external calamity occurs.

The German Industry Federation has just surveyed its constituent members - operating at a healthy 84 percent of capacity -- and found none expects a sharp slowdown. But industrialists do worry about the yawning imbalances between the prosperous north of the eurozone and its debt-ridden, crisis-prone south.

"A monetary union needs a minimum degree of homogeneity," said one industrial leader. "If other countries don't want a large tradeable sector with plenty of manufactured goods, the eurozone is not sustainable." Southern Europe, he suggested, might want to try using its unwanted properties built during the boom years for medical treatment, and develop an industry treating patients better and more cost-effectively than elsewhere.

Others in Berlin worry about the eurozone's endless ability to spring unpleasant surprises.

"At the moment the bloc is like a group of skittles," one senior government official said. "Some are unstable and there is a danger that one falls over and knocks others down with it. But we don't know which one it will be. It could be the Greek skittle or the Italian one or the Spanish one. Or there could be a skittle flying in from the outside such as a Chinese one."

But all in all, there are no major worries at home, where political stability, economic prosperity and one of the world's highest standards of living survive largely intact, even as other parts of Europe teeter on the edge of the abyss.

So with such a benign domestic political and economic landscape, is Germany celebrating? Unbridled joy does not come easily to the Berlin elite. "It is not true that we have no problems," said one minister. "We are one of the fastest-ageing countries in the world and from 2020 onwards we face a difficult situation in this respect."

That's a problem the Greeks can only dream of having.

(editing by Janet McBride)