BERLIN Feb 1 Chancellor Angela Merkel's
conservative party faces the prospect of a heavy defeat in
February in the first of seven regional elections this year that
could reverberate in the capital and across Europe.
A series of scandals dogging her popular defence minister as
well as Europe's sovereign debt crisis are two other sources of
possible discomfort in February for Merkel, whose party has so
far failed to reap any benefit from solid economic growth.
The German economy's strong performance at the start of 2011
follows an impressive growth rate of 3.6 percent in 2010 -- the
fastest pace in two decades [ID:nLDE70A1OB]. The government then
raised its 2011 forecast by half a percentage point to 2.3
percent while private economists expect growth of 2.5 percent.
Following are some of the factors to watch:
Merkel's Christian Democrats (CDU) could be swept from power
in a Feb. 20 election in the city-state of Hamburg by the
centre-left opposition Social Democrats and Greens party after
ruling the prosperous northern port for the last 10 years.
Opinion polls in Hamburg showed the SPD far ahead with 43
percent (up from 34 percent in the last election in 2008) while
the CDU slumped to 26 percent -- far below the 42.6 percent the
CDU won in 2008.
A big defeat in Hamburg could rattle nerves in the CDU ahead
of three more state elections in March, in particular in the
conservative bastion of Baden-Wuerttemberg that the party has
ruled for six decades. The CDU also faces defeat there, although
recent polls show they have an improving chance of holding on.
Merkel's coalition lost control of the Bundesrat upper house
of parliament after losing a regional election in May in North
Rhine-Westphalia, meaning that left-wing opposition parties now
block or interfere with much of her planned legislation.
Analysts warn losing more key states in quick succession,
especially Baden-Wuerttemberg, would cause rumblings in the CDU
rank and file. But it is unlikely Merkel would face any serious
challenge to her leadership.
Merkel's conservatives are steady in national opinion polls
at about 36 percent. But their coalition partners, the Free
Democrats (FDP), are stuck at 3-4 percent from almost 15 percent
in the 2009 election.
The opposition SPD are at about 27 percent and the Greens at
20 percent. The SPD got 23 percent in the 2009 election and the
Greens were at 10.7 percent.
What to watch:
- Rumblings in the CDU about Merkel after an expected heavy
defeat in Hamburg
- The FDP's weakness under Guido Westerwelle, foreign
minister. It will remain a source of coalition tension.
EUROPEAN DEBT CRISIS
The euro debt crisis also plays a role in state elections
this year. Wary of a backlash from voters, Merkel has resisted
calls in Europe to expand the 440-billion euro ($570 billion)
European Financial Stability Facility (EFSF).
The FDP, facing a drubbing, is especially firm in its
opposition to raising the size of the EFSF [ID:nLDE70P1KF].
But signs are emerging that Merkel is now trying to lead the
debate. In a discussion paper obtained by Reuters, her office
proposes a euro zone pact to improve competitiveness in exchange
for German backing for any boost to the EFSF [ID:nLDE70R1XX]
What to watch:
- Merkel's public comments about the euro zone debt crisis
and any change in fundamental reservations about raising EFSF.
Germany suffered its biggest postwar recession in 2009 when
the economy contracted by 4.7 percent. Driven mainly by exports
and helped by a pick-up in household consumption, it emerged
from the slump. Business morale is currently at a record high
and consumers' propensity to splash out money on big ticket
items has not been this strong since December 2006.
As monetary and fiscal stimulus is gradually withdrawn from
the global economy and some euro zone trading partners embark on
strict austerity measures, Germany's red-hot export growth is
expected to cool off and return to a more sustainable level.
Barring any major shocks from China, Germany should remain a
one of the preeminent suppliers of high-quality capital goods to
dynamic emerging markets looking to improve their infrastructure
and boost productivity.
Many economists argue healthy corporate earnings and a
tightening labour market will mean employers will have to raise
wages to retain skilled workers. This should feed through into
domestic consumption but could fuel inflationary pressures.
What to watch:
-- Whether demand for German goods among EU trading partners
drops as a result of the sovereign debt crisis
-- Whether major export market China will throttle demand
and to prevent its economy from overheating
-- If unemployment continues to fall, this should continue
to support growth in consumer spending.
Bank bailouts, labour market subsidies and stimulus measures
to boost growth have all added to Germany's debt burden.
Berlin estimates its total outstanding public debt rose to
82 percent of its overall economic activity, and Kiel-based
think-tank IfW estimates it will grow to 84.3 percent of GDP in
2011 -- above the Maastricht criteria of 60 percent.
This year marks a turning point for Germany's state
finances, as a new "debt brake" law comes into effect, forcing
the federal government to reduce the gap between its annual
revenue and spending to under 10 billion euros by 2016.
What to watch:
-- Auctions early in the year may still signal steady demand
for Europe's benchmark debt, but the market could demand higher
compensation in the coming months to offset inflationary risks.
-- Will Germany's plans for net new borrowing of 48.4
billion euros be revised substantially lower when the budget is
reviewed in March? Originally it planned to issue on balance 80
billion more in debt last year only to reduce by nearly half.
For political risks to watch in other countries, please
click on [ID:nEMEARISK]
(Editing by Sonya Hepinstall)