Published in Business Spectator (Melbourne), 12 January 2012

http://www.businessspectator.com.au/bs.nsf/Article/Angela-Merkel-Nicolas-Sarkozy-eurozone-debt-crisis-pd20120110-QD6EF?OpenDocument

Whoever believed that the never-ending eurozone crisis had been solved during the holiday break would have been surprised by the difficult French bond auction last week, Italian yields once again shooting above the crucial 7 per cent mark, and renewed speculation about a Greek default.

In short, there would have been enough reasons to refocus on the core problems of the European crisis after Christmas.

But none of these events would have featured on Angela Merkel’s radar. The German chancellor has other problems than the hard facts of the financial crisis. Her problems are called Nicolas and Christian. One is the president of France, the other is the president of her own country. And neither may be in office for much longer.

At a time when Europe is once again looking at Germany and, to a lesser degree, France as the two countries that ultimately will decide the fate of the common currency and the future of the European Union, political distractions threaten to paralyse the process.

While French presidential elections in April and May require Nicolas Sarkozy’s full attention, Germany’s Federal President Christian Wulff has caused a political crisis, not least for Chancellor Merkel, with revelations about personal misconduct.

Merkozy, the celebrated rescue duo for the continent, are drawn to fight domestic battles at a crucial point in the eurozone crisis. “Mer” dreads losing her second president in as many years, “Kozy” fears losing the presidency himself. Despite their relentless European summit diplomacy, their attention is thus absorbed by power struggles on their home fronts.

Nicolas Sarkozy must hope for a political miracle if he wants to remain president. Opinion polls have been solidly against him for a long time. There is even a slim chance he could be eliminated in the first round of the elections if right-winger Marine Le Pen manages to put him in third place. She is currently trailing the incumbent by a margin of 7 per cent. In the final run-off election, however, socialist candidate François Hollande is predicted to beat Sarkozy with a comfortable majority.

Sarkozy, who has always been known as impulsive and at times unpredictable, has to fight for his political life or he will be a one-term president. Under such pressure, how likely is it that he will not give in to sudden populist temptations? How much political capital does he still wield considering that France is also at risk of losing its triple-A rating anytime in the coming months?

Until Election Day it could well be that we will not see so much a lame duck French president but a headless chicken. Election campaigns are seldom times in which calm and reasonable arguments prevail. They are almost never times when solid policymaking takes place, even though that is what Europe desperately needs right now. But don’t expect it to originate from Paris.

Angela Merkel will be watching the movements of her most important European partner with concern, particularly since any agreement on issues such as fiscal union may not last beyond May. Where a new president Hollande may take France in European affairs is hard to predict but as a French left-winger, he does not share Merkel’s enthusiasm for stricter fiscal rules and harsher austerity regimes.

Internationally, Merkel is seen as a strong and sometimes feared figure, yet her position at home is becoming increasingly difficult: not just because of her weak Liberal coalition partner, who is down to a record low of 2 per cent in the polls – a level that would not even see it in a future parliament. Merkel’s biggest worry at the moment is Federal President Christian Wulff, whom she had nominated to the largely ceremonial office of Germany’s head of state two years ago.

In December, newspapers revealed embarrassing and potentially illegal details of Wulff’s personal and financial affairs. When he was still state premier of Lower Saxony he had accepted a cheap loan from an entrepreneur friend, or rather his wife as he now claims, to finance his home. When previously asked in state parliament whether he had any financial dealings with this businessman he had nevertheless denied it.

Journalists digging deeper into the president’s financial circumstances soon discovered more evidence of accepting undue advantages from his contacts. Free holidays, paid advertising campaigns for his book, and a super-cheap mortgage arrangement from a state-owned bank all added to an impression of a politician who mastered the art of using office to his personal gain.

The scandal would have probably died down if it had not also been revealed that the president had left angry messages on the answering machines of a journalist and a publisher, threatening them with ‘war’ and criminal prosecution if they went ahead with their stories.

From this moment onwards the affair had the potential of turning into a constitutional crisis. The legal hurdles to remove Wulff from his office may be high, but a head of state engaged in anti-democratic conduct against the free press may well be politically untenable.

The president’s crisis has become Angela Merkel’s very own problem as it was her idea to install Wulff in his office in the first place. To make the situation worse for her, there is no guarantee that she will find a majority for another candidate in the Federal Assembly.

Losing ‘her’ president and failure to produce a replacement would be hugely embarrassing to Merkel. She knows that many commentators would interpret it as the beginning of the end of her chancellorship. She might even conclude that it is better to leave a fatally damaged president in office if only to spare her political humiliation – unless Wulff’s fall from grace eventually shows up in Merkel’s own approval ratings.

None of this is good news for what lies ahead in the eurozone crisis. At a time when leadership would be required, the two most important continental European leaders are absorbed by political struggles they probably cannot win. The likelihood of the Merkozy tandem delivering anything substantial over the coming months is slim; the probability of this political marriage lasting beyond May is even more remote.

The eurozone crisis may soon return with more bad news from bond markets. Pity Europe’s leaders are too busy to deal with it.