Crunch Time for Merkel and Germany

06/15/2010 2:32 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

The government of German Chancellor Angela Merkel faces a critical vote on June 30. If it loses the vote, the country will be plunged into new elections just as German opposition to the euro debt bailout is near a peak.

There’s some chance that a government opposed to bailouts for Greece, Spain, and Portugal could win those elections. And an even better chance that any Merkel-led government that survived would be much weaker.

That could well send the euro zone back into crisis. (I’m no fan of the Merkel government or its policy of budget cuts for the euro zone’s key economy, but I can’t see how a weaker Merkel government or a coalition opposed to Germany’s contributing to fix the euro debt crisis would help. For more on Merkel’s proposed budget cuts, see this post.)

The vote on June 30 to fill the slot that Horst Kohler left open when he resigned as president in May doesn’t appear related to the euro crisis. The job is largely ceremonial, and it’s filled by secret ballot by members of the German Parliament and representatives of Germany’s states.

But the vote comes after a series of electoral defeats and political defections tied to the deep unpopularity of Germany’s participation in the bailout of Greece and of the country’s participation in plans to support other deeply indebted European countries.

The vote has thus taken on the stature of classic parliamentary test. A vote against Merkel’s candidate, Christian Wulff, will be the equivalent of a “no confidence” vote against Merkel’s coalition government and its euro policy.

The tide is running against the chancellor. In May, her coalition of Christian Democrats and Free Democrats got trounced in elections in North Rhine-Westphalia, Germany’s most populous state.

In addition to President Kohler’s departure, Merkel’s government has witnessed the resignation of Roland Koch, the leader of Merkel’s Christian Democrats in the state of Hesse. Koch will step down as state prime minister in Hesse in August.

Recent polls are against Merkel as a majority of German voters surveyed doubt that her government will survive until the end of its term in 2013 without calling new elections.

Any new elections aren’t likely to hand a clear-cut victory to Merkel’s opponents, the Social Democrats. The most likely result would be that Merkel would have to patch together a new coalition government with less unity than the current alliance with the Free Democrats.

A weaker coalition government will be even less likely to lead in the euro debt crisis and will show even more reluctance to support plans to guarantee the debt of Portugal and Spain as those countries struggle to avoid going the way of Greece.

As to the June 30 presidential vote, it’s Merkel’s misfortune that her candidate, a rather colorless state leader, is opposed by Joachim Gauck, a former East German human rights activist, who as overseer of the Stasi archives pursued the campaign to uncover the crimes of the East German secret police.

In a secret ballot, Gauck could well win support from representatives in Merkel’s own coalition who nonetheless admire Gauck’s role in opposing the East German regime.

When it rains, it pours. Or as they’re saying in Berlin right now, Ein Ungluck kommt selten allein. It could mean trouble, in any language.

Full disclosure: I don’t own shares of any company mentioned in this post.

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