Can the Eurozone Survive Merkel's Departure?

Angela Merkel Eurozone
German Chancellor Angela Merkel speaks in Berlin, June 24. Her right-wing partners feel vindicated by the rise of U.S. President-elect Donald Trump. Hannibal Hanschke/reuters

This article was first published on the American Enterprise Institute site.

In gauging the eurozone's long-run prospects of holding together, one would be well-advised to keep a close eye on German political developments in the runup to next year's German parliamentary elections.

Those developments are all too likely to further undermine Chancellor Angela Merkel, who has been by far the most dominant European figure in successfully managing the European sovereign debt crisis to date.

There are many reasons for concern about Merkel's future political prospects. Over the past year, in the wake of her unpopular open-door Syrian migrant policy, the once highly popular and invincible Merkel has seen her personal popularity drop to below 50 percent.

This has increasingly raised questions as to whether she will seek a fourth term in the September 2017 elections.

Meanwhile, over the past year, national support for her Christian Democratic Union (CDU) party has dropped by some 10 percentage points to its present level of 35 percent.

Ominously, the main beneficiary of Merkel's relative decline has been the rise of the far-right and populist Alternative for Germany Party, which would like to see an end to the euro. That party now polls at around 12 percent at the national level and as high as 20 percent in some states.

The rapid erosion of Merkel's popular support has emboldened factions within her own CDU party to openly criticize her policies. It has also encouraged her coalition partner, the Social Democratic Party, to increasingly distance itself from Merkel in the runup to the 2017 parliamentary elections.

From a European perspective, there are two principal reasons to be worried about any further erosion in Merkel's political standing. The first is that she has been the dominant force in holding an increasingly divided eurozone together. She has also been the driving force for generating continued German support for bailout programs of the European periphery as needed.

A striking example of her critical role in keeping the eurozone together was her publicly overriding Wolfgang Schäuble, her finance minister, in June 2015 when he opposed a further Greek bailout program and expressed the view that Greece should be encouraged to leave the euro.

The second reason for concern is that in the year immediately ahead there is every likelihood that the eurozone is likely to be severely tested. This is not simply because political and economic troubles could resurface in any of the countries in the European periphery. Rather, it is because it is difficult to see how Italy, the eurozone's third largest economy, will avoid a major economic and political crisis in the year ahead.

This is not least because that country is now facing a toxic combination of sclerotic economic growth, a highly troubled banking system, a mountain of public debt and an anti-euro populist movement that is now on the march.

It also does not help matters that should an Italian bailout be required, it would have to be a multiple of the International Monetary Fund-EU bailouts for Greece, Ireland and Portugal if it were to have any chance of working.

Against this backdrop, one has to hope that Merkel's fortunes soon take a turn for the better. Without having her at both the German and the European helm, there would be the real risk that the eurozone could be torn asunder.

Desmond Lachman is a resident fellow at the American Enterprise Institute.