Strategy shift

It was quite a triumph for Merkel when 25 of the EU's 27 member states signed the fiscal compact at the most recent EU summit, in March. The compact aimed to help debt-ridden eurozone nations reduce budget deficits.  But the mood has been downhill ever since. Politicians and voters alike have lashed out against painful cuts called for in the compact.

Demonstrations against rigorous austerity measures are on the rise in several southern European countries. And not only that. A government coalition in the Netherlands collapsed because of its austerity budget, while in France, Hollande has even called for a renegotiation of the fiscal charter.

Members of the German opposition, with the exception of the Left Party, have not taken their suggestions that far. Still, the main opposition Social Democrats (SPD) and the Greens are demanding a growth agenda to supplement March's fiscal compact.

The opposition also expects the German government to firmly commit to a financial transaction tax, which has so far failed to find consensus among other EU countries.

Opposition support needed

Domestic political opposition could turn out to be Merkel's biggest problem. She needs opposition parties' support to secure a legally-required two-thirds majority in both houses of parliament to adopt the fiscal compact. If she does not succeed in ratifying the charter in Germany, she might as well stop making demands on an EU level.

Merkel has said there can be no question of renegotiating the fiscal compact. But she has also conceded that new measures are needed. Speaking last week about a euro agenda to boost growth, she seemed to signal some assent to Hollande's proposals. The gesture might also placate Germany's opposition.

At the same time, the German chancellor consistently draws the line at one principle, insisting that European growth policies not water down the fiscal compact. In Merkel's view, the EU cannot give up on long-term efforts to lower national debt levels across the eurozone.

Two-tier approach

Merkel's growth agenda rests on two pillars. In an interview with the Leipziger Volkszeitung newspaper Saturday, Merkel said she was ready to bolster the European Investment Bank (EIB). However, she did not give any details for the proposal, and it remains unclear how countries can manage the move without burdening their own budgets.

Michael Link, a senior official in the German Foreign Ministry, outlined the second pillar of Merkel's growth agenda. That entails using EU infrastructure funds more flexibly to spur economic growth. Link said the EU's next budget–which will be proposed in 2014 and cover a seven-year period–should have a stronger emphasis on growth.

He added that 40 to 45 percent of the 1 trillion euros ($1.32 trillion) currently proposed for the 2014 EU budget would be available for structural change. Link pointed out that infrastructure funds have already been accessible since  the March EU summit, because rules on how much a state must finance out of its own pockets were relaxed for the eurozone's crisis-ridden member states.

Merkel's proposed growth agenda is not an exclusively German initiative. France, Italy, Austria, Finland, the Netherlands and Sweden have joined forces to figure out the best way to distribute infrastructure funds in the future. Their proposals are expected to be bundled in time for the next regular EU summit on June 28. With the new French president in office by then, the resolution's signatories might well include Hollande.

Rush to ratify

Germany's Social Democrats doubt the coalition government will meet its goal of setting a parliamentary vote on the compact by the end of May. Everyone involved in the process seems to think the same thing, but the government does not want to wait until after a summer break for the vote.

In light of how difficult ratification is in many EU member countries, Germany wants to push ahead with the project. That could be in early July, a week after the EU summit.

By then, Germany's coalition government might have commited to a pan-European fianancial transactions tax–one of the opposition's conditions for agreeing to a new fiscal charter.

In the past, the liberal junior partners in Merkel's center-right coalition, the Free Democrats (FDP), have blocked any such move. However, their stance might change ahead of two key state elections this month.

Voters take to the polls in both Schleswig-Holstein and North Rhine-Westphalia. They they appear to be little inclined to reward Merkel's Christian Democratic Union (CDU) or the FDP for their handling of the euro zone crisis. By coincidence, the Schleswig-Holstein ballot happens the same day as the French presidential vote, May 6.

Hollande is already considering Merkel's recent comments on the growth agenda a victory. He told French radio he expects Merkel "will budge even further."

Still, Hollande might be the one to end up backtracking on his demands once the French presidential campaign is over.

Author: Peter Stützle/db
Editor: Shant Shahrigian