Chancellor Angela Merkel’s party suffered its worst defeat since World War II in Germany’s richest state, losing control of Hamburg in the first of seven state elections this year that threaten to limit her scope to tackle Europe’s debt crisis.
The result in Hamburg, the city-state of Merkel’s birth, underscores the challenge she faces trying to balance public opposition to bailouts for debt-wracked states against pressure from investors and fellow euro countries to lead the way in stemming the debt contagion. She faces three more state ballots next month on either side of a March 24-25 European Union summit called to form a comprehensive plan for the crisis.
“It’s a warning to Merkel,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. “If she has to draw any lesson, it probably will be to get tougher at the European level to show something to German voters,” he said. “There is no room for Merkel to come home from Brussels on March 25 with anything that could look or smell like a defeat.”
Portuguese government bonds declined for a second week before the vote, leading securities of high-deficit countries including Greece lower. Yields on Portuguese bonds rose to within five basis points of the most since the euro’s inception in 1999, while faster inflation risks unsettling German voters. Portugal’s 10-year yield has stayed above 7 percent the last 11 trading days.
If German voters aren't going to play ball with the bailout plans for countries like Greece and Ireland, and as Portugal and Spain continue to teeter on the edge, it's going to get really bad, really fast. Merkel's in bad shape here, and the German opposition is running on a platform to tell the rest of the European Union to stuff it where the sun don't shine.
Could we be seeing more demonstrations in Europe soon? I think it's quite likely.