Analysis: Europe, waiting for Germany, could be disappointed

By Paul Taylor

PARIS (Reuters) - European policymakers have higher hopes than expectations of change in German policies after a general election next Sunday that has kept much European business on hold for months.

From Athens to Lisbon and Paris to Rome, governments want Berlin to move forward fast with a European Union banking union and adopt a more expansion economic policy that would help drive growth and fight unemployment in a stagnant euro zone.

EU partners expect conservative Chancellor Angela Merkel to win a third term, and many hope she will have to form a grand coalition with the center-left Social Democrats (SPD), seen as more pro-European and pro-stimulus than her current center-right Free Democratic allies in government.

The potential for disappointment is large.

"Whoever is elected, the constraints that Merkel has faced will remain the same for any German government," said Sylvie Goulard, a French liberal member of the European Parliament.

The triple lock of parliamentary sovereignty, hostile public opinion and a vigilant constitutional court will continue to limit Germany's willingness to share more European liabilities.

Merkel and her SPD challenger Peer Steinbrueck barely mentioned European and foreign policy in their only television debate, except to agree that Germany should have no part in any military response to the use of chemical weapons in Syria.

Steinbrueck accused Merkel of bungling the euro zone crisis by going slow and inflicting a poisonous dose of austerity on Greece and other bailed out countries. He kept silent about SPD support for pooling some euro zone debts, sensing a vote-loser.

The chancellor noted the SPD had voted for all her euro zone bailout but she offered no personal vision of Europe's future.

With the survival of the single currency no longer under threat and financial markets calm for now, experts expect Merkel to stick to her "small steps" approach to euro zone integration unless acute crisis flares again.

The need for further financial support for Greece, Portugal and perhaps Ireland will cause much grumpy debate in Berlin. Frustration at chronic Italian political instability and French aversion to liberal economic reforms will smolder.

Perhaps as important for German policy as the election result may be a ruling by the constitutional court next month on the European Central Bank's bond-buying policy, which calmed the crisis when ECB chief Mario Draghi announced it last year.

The court is not expected to declare it illegal, but it may set conditions that could make the policy hard to implement.

OWN PACE, OWN TERMS

"Germany will build Europe at its own pace and on its own terms. The others need to swallow and understand this," said Ulrike Guerot of the European Council on Foreign Relations. "If they try to rush us, it will take longer."

Berlin would continue to demand binding European control over national budgets and parliamentary accountability for euro zone funds as a condition for accepting any greater backstop ping of other countries' debts or banks, she said.

Progress is likely to be slow not least because perceptions of the causes and remedies of the euro zone's crisis still diverge widely between Germany and the rest of the world.

"We Germans talk about respect for rules and constitutional legality. The French talk about the need for a European strategy and solidarity. The British and Americans talk about rebalancing the economy and want 'Big Bazooka' solutions," Guerot said.

Though its clout as Europe's biggest economy has grown in four years of crisis, giving it effective veto power over any European solution Berlin remains reluctant to exert leadership, especially if that means taking on any more risk.

"Germany wants to be imitated but it doesn't want to lead," said Jose Maria de Areilza, professor of law at Madrid's ESADE business school. "There is a big gap between its more assertive economic power and lack of leadership in security and defense."

Christian Lequesne, research director at France's Sciences-Po institute in Paris, said Germany was becoming "a big Switzerland", accumulating wealth while avoiding international responsibility in crises like Syria or the euro zone.

"They have no desire to risk blood or treasure. They are in a 'zero risk' mindset," he said.

Prickly about efforts to impose more European discipline on national budgets and economic reforms, the French want a re-elected Merkel to move fast on practical steps such as EU funds to fight youth unemployment, to head off a feared Euro skeptic tidal wave in next year's European Parliament elections.

UNDER INVESTED

Most Germans share Merkel's view that other Europeans just need to emulate the German model of public and private thrift at home and competitiveness abroad to solve their economic woes.

There is little, if any, inclination to acknowledge that Germany's export-driven economic model, excess savings and suppressed domestic demand might be part of the problem.

Nevertheless, some policymakers and analysts in Brussels and Berlin expect a shift in economic policy, especially if the Social Democrats or the Greens take a role in coalition.

"What may well happen is a rethinking of national economic policy, not for Europe's sake but for Germany itself," said Daniela Schwarzer, head of European research at the German Institute for International and Security Affairs (SWP).

"We have under invested in infrastructure, education and research," she said. That would raise wages and domestic demand and could attract more workers from poorer European states.

For most euro zone partners, the top priority is to create a single European resolution system to wind down failed banks after giving the ECB the role of supervisor for some 6,000 banks. They want it underpinned by a common backstop fund until enough money is raised from banks' own contributions.

Economists say this is urgently needed in case a planned ECB review of the quality of banks' assets produces nasty surprises, and to help restore credit to business in southern Europe.

"Spain really wants a single resolution mechanism fast ... because there is still uncertainty around its banking sector, which will emerged smaller and less able to lend because it will have to raise more capital," De Areilza said.

Germany, which fought to keep its own politically sensitive regional and savings banks under national supervision, has so far argued that any central resolution authority would require changing the EU's treaty because it impinges on national budget sovereignty. But euro zone officials say Berlin is preparing to compromise after the elections.

While Merkel has called in the past for a new treaty to enshrine political union with more central control over euro zone countries' budgets, she seems less keen now, perhaps in deference to France, which is keen to avoid a divisive referendum on ceding fiscal sovereignty to Brussels.

(Writing by Paul Taylor; editing by Ron Askew)