Even if all of these challenges were overcome, it is unclear how quickly Germany could hold a referendum and change its constitution, but certainly it could not be responsive to today's crisis. Clearly, Merkel's tactical successes may now be her strategic undoing.
The Constitutional Court's decision will bring Chancellor Merkel's political day of reckoning closer at hand. Another parliamentary vote will be necessary to approve bailout funds for Spain and likely additional funds for Greece. For months, her own party and coalition partners have openly rebelled against her request for further bailouts, causing Merkel to rely on votes from the opposition Social Democratic Party (SPD). Eyeing 2013, the SPD has demanded that the German constitution be changed by national referendum to support a full European fiscal and banking union, as well as the creation of Eurobonds. With an opposition unwilling to continue unconditional support for the chancellor in parliament and a coalition growing increasingly nationalistic and hostile, Merkel's government may not see 2013.
What if Angela Merkel had to make a choice between saving the German economy and saving the euro? With Germany's historically low unemployment, negative borrowing costs, and a depreciating euro boosting its exports, the German economy has successfully weathered, if not prospered during, the debt crisis. However, softening German manufacturing figures and plummeting consumer confidence show that the German economy is not immune from contagion. A struggling economy, intense German hostility toward future bailouts, and next year's election make her decision clear: she must choose Germany.
But safeguarding German interests means that Germany would no longer be willing to foot nearly one-third of the total bailout bill or use its AAA credit rating (which has recently been put on negative credit watch by Moody's Investors Service) for future European bailout funds. Should the euro zone collapse and Europe return to its separate national currencies, catastrophic events would unfold for both Europe and Germany. For Germany, a return to the deutsche mark would mean its currency would appreciate substantially, causing German exports (which represent 50 percent of German GDP) to plummet. Weak German banks would collapse; others would need massive recapitalization and their liabilities redenominated. Capital controls would be imposed, and the credit market would cease to function. The European Central Bank's centralized payments system would likely collapse, leaving Germany with liabilities that could exceed one-third of its GDP. One estimate suggests that the cost of Germany's departure from the euro zone could be upwards of 25 percent of its GDP. In this scenario, Angela Merkel would be the chancellor that loses both Europe and Germany.
Today, as soft bank runs occur in southern Europe, the euro zone falls into recession, and European banks cease lending to one another, the euro zone has already begun to fray, if not unravel, with unknown consequences. Merkel's moment may have passed, her legacy already determined.
