Germany's Anti-Euro Party Is A Nasty Shock For Angela Merkel

 Political revolt against the euro construct has spread to Germany.

By Ambrose Evans-Pritchard

A new party led by economists, jurists, and Christian Democrat rebels will kick off this week, calling for the break-up of monetary union before it can do any more damage.

"An end to this euro," is the first line on the webpage of Alternative für Deutschland (AfD). "The introduction of the euro has proved to be a fatal mistake, that threatens the welfare of us all. The old parties are used up. They stubbornly refuse to admit their mistakes."

They propose German withdrawl from EMU and return to the D-Mark, or a breakaway currency with the Dutch, Austrians, Finns, and like-minded nations. The French are not among them. The borders run along the ancient line of cleavage dividing Latins from Germanic tribes.

The plans draw on work by Hans-Olaf Henkel, former head of Germany's industry federation (BDI) and a chastened europhile -- the "worst error of my professional life", he told me.

The appeal of German exit is obvious. It is the least traumatic way to end the 20pc to 30pc misalignment between North and South, the cancer eating Europe. Club Med keeps the euro. It enjoys instant devaluation, while still able to uphold euro debt contracts. The spectre of sovereign defaults recedes.

The party hopes to contest the federal elections in September, winning enough votes to scramble a tight race. Chancellor Angela Merkel suddenly has a "UKIP problem" on the her right flank.

Should she sign off on a bail-out out for Cyprus -- safeguarding the "dirty funds of Russian oligarchs", as the AfD puts it -- she will be raked by heavy fire.

That will test her solidarity mantra, and she can turn on a Pfennig. She ditched her nuclear energy policy days after surveying the post-Fukushima polls.

Nobody knows how much support AfD could command. Protest parties usually flop in Germany, but the Free Voters won 10pc in Bavaria in 2008 on a Right-leaning, eurosceptic ticket, and there have never been circumstances quite like this before.

The slide towards fiscal union is a constitutional revolution. It erodes the budgetary supremacy of the Bundestag and threatens to eviscerate Germany's vibrant post-war democracy. Large matters.

The AfD leader Bernd Lucke says Beppe Grillo's threat to default on Italy's external debt has demolished claims that Germany's rescue pledges will never be called.

"The Italian election shows how dangerous the whole euro crisis really is. Whether countries can and will pay back their debts is dependent on the unpredictable voting choices of their peoples," he said.

Professor Lucke, an expert on Real Business Cycle Theory, says German voters may not have mastered EMU mechanics but they can see it is going off the rails. "Everybody understands that 50pc youth unemployment in Greece and Spain is a catastrophe," he said.

The latest ZDF poll shows that 65pc of Germans think the euro is damaging, and 49pc think Germany would be better outside the EU. This is no doubt "soft", yet what is clear is that the all-party consensus on EMU gives voters nowhere to turn.

The rebels may struggle to cross the 5pc threshold for seats in the Bundestag, but they do not have to take seats to plague Angela Merkel over the next six months. She is already in trouble. Her Free Democrat (FDP) allies have crashed to 4pc in the polls.

Alternative für Deutschland threatens to take votes from the Right. On the other side, the Green resurgence to 16pc makes up for the sluggish Social Democrats. As things stand, the Left is slightly ahead. Angela Merkel is on course to lose office.

"Merkel will have to be even tougher on Europe, she cannot allow herself to be outflanked," said David Marsh, author of books on the euro and the Bundesbank. "She will try to keep up a steely facade and hope everything stays calm until September, but the next crisis may come to a head before that."

Indeed it may. Italy does not have a government, and putatitve premier Pier Luigi Bersani has vowed break out of the "austerity cage", explicitly rejecting policies that anchor the EU backstop for Italian bonds.

Fitch expects Italy's public debt to hit 130pc of GDP this year, up from 125pc forecast a few months ago. The country has one foot in a debt compound trap already. One more shock will do it.

This latest deterioration is self-inflicted, the result of contractionary EU policies that have pushed Euroland into a double-dip slump, and ravaged Italy in particular with fiscal tightening of 3pc of GDP in 2012.

This policy was deranged. Italy's primary budget was already near balance. Fiscal overkill caused to the economy to contract by 2.6pc in 2012, and the debt ratio to rise even faster. In flogging Italy's economy to death, EU elites have destroyed political consent for the reforms that are most needed.

For Germany's Alternative, September may come too soon. Michael Wohlgemuth from Open Europe says they lack the organization for a quick breack-through, but their moment may come in next year's vote for Euro-MPs.

"By then the real costs of the bail-outs for German taxpayers will be clearer. People sense that at a crisis is looming, but they have not yet felt it," he said.

The tragedy for Germany is that the bill for EMU will come due just as the country's aging crunch hits. Germany will have impoverished itself for no useful purpose, and without winning much love in the process.

Some say Germany is "winning" because its firms are conquering Club Med markets with a rigged exchange rate, but that is a Pyrrhic triumph. Latins will not tolerate this, once they grasp that the "gains" of their internal devaluations -- ie 1930s wage cuts -- are dwarfed by the greater losses of a wasted youth.

There are no winners. Each country is blighted in turn, and in different ways. Like Goethe's Sorcerer's Apprentice, they have launched an experiment they cannot control. The broom has a fiendish will of its own.


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