Germany's Chancellor Angela Merkel has been under fire for months over her apparent paralysis in the face of the global financial crisis. Her steadfast refusal to join the rush of Western leaders to stimulate their faltering economies through massive fiscal stimulus packages has angered her friends in Europe and sparked something of a civil war within her conservative alliance at home. This week, she finally seemed to relent, promising to spend a "few billion" in public funds on a stimulus package. The only catch: Merkel will keep her own cards close to her chest until Barack Obama reveals his own spending plan after his inauguration as U.S. President on January 20. "If it's sufficient for America to put together a big program when the new President is in office," Merkel said this week, "then it's also enough for Germany to present a second program in a similar timeframe."
During the first two years of her term as chancellor, Merkel charmed Europe with her deft handling of difficult diplomacy. But some of her European colleagues fear she lacks the grasp and courage to deal with the economic crisis, and are looking, instead, to French President Nikolas Sarkozy for leadership. "In the early part of her term, the problems in Europe required her style of leadership, her style of moderating. But now we are in the midst of a crisis that needs the kind of leadership provided by Sarkozy," says Daniel Gros, director of the Center for European Policy Studies in Brussels.
It's not like Germany has done nothing. Merkel's awkward coalition of conservative Christian Democrats and center-left Social Democrats cobbled together a laundry list of spending measures totaling 31 billion euros ($44 billion), most of it on projects that were already planned. Critics immediately dismissed the plan, calling for a more robust "Stimulus 2.0". Germany was also among the first countries to establish a bank rescue fund — worth some 500 billion euros ($712 billion), although this came only after Merkel rejected calls from her European partners for a single European fund, which some analysts believe would have been more effective. German lawmakers hammered the fund together in a week and included painful sanctions for the banks, forcing recipients to restrict executive pay to 500,000 euros ($712,000) and to suspend payment of dividends to shareholders as long as they required taxpayer support.
Critics believe the harsh restrictions may have made the fund ineffective, with only banks on the verge of collapse tapping into it, while most have chosen to muddle through unaided, but are reluctant to lend the funds necessary to spur the economy. "There is an element of punishment involved and that's why the banks won't accept it," says Hans-Werner Sinn, head of Germany's respected Ifo economic institute. "That's why we need to force the banks to tap the funds."
Still, the slow and cautious approach that has made Merkel one of Europe's most popular politicians may yet help her through the latest crisis — German voters are wary of any sign of flamboyance in their political leaders, and take a dim view of Sarkozy's more manic leadership style. Still, as Germany's economy weakens — it is projected to shrink by as much as 3% next year — the pain is beginning to set in. Unemployment, at its lowest level in 16 years, is set to rise sharply, and Germany's world-class engineering and automotive industries have gone from boom to bust in record time.
Frightened voters no longer approve of Merkel's cautious response, and with an election looming next year, that may have prompted her sudden change of heart regarding economic stimulus. A recent poll by ZDF, the public broadcaster, shows that 48% of German voters think the government is not doing enough about the financial crisis, compared with 26 % who believe its response has been sufficient — and 10% who say it's doing too much. Merkel's approval rating fell from 56% in November to 52% this month.
Having stood firm under pressure from all the special interests in her unruly coalition until now, her epiphany on the issue of bailouts has now unleashed a cacophony of demands. Unions want employers to promise no layoffs during the recession, while small and mid-sized companies want the government to force banks to resume lending. The Social Democrats want to put cash in the pockets of ordinary citizens to enable them to go shopping and boost weak public consumption. And Merkel, a deficit hawk by instinct, is also under pressure from leading conservatives to cut taxes fast and deep.
Despite the pressure, Merkel can making a plausible case for waiting to see what an Obama Administration has planned. Germany's export-oriented economy depends on the U.S. not only to buy its wares, but also to prime the global economy. But critics believe waiting for Obama is less a sign of prudence than it is evidence that Merkel and her government still have no coherent plan.
"It's a flimsy excuse to do nothing," says Carl-Ludwig Thiele, a senior lawmaker in the opposition Free Democrats. "The government is playing for time in an irresponsible manner and should respond more decisively."