Germany's opposition social Democrats beat the ruling Christian Democrats in the state of Mecklenburg-Western Pomerania by a wide margin in the voting on Sunday.
This margin is even more lopsided when one takes account of the fact that Chancellor Angela Merkel's coalition partners, the Free Democrats, did not cross the electoral threshold while the Party of the Left and the Greens, both potential Social Democratic partners, also did quite well.
What made the defeat even more galling is the fact that Chancellor Merkel herself comes from Mecklenburg-Western Pomerania. The Christian Democrats have lost all 6 state elections held this year.
Mecklenburg-Western Pomerania has the highest unemployment rate in Germany and a backlash against the ruling party was anticipated, but even so, the euro fell as a result of these state elections. What investors discerned was stiffening resistance to the idea that Germany would either make a substantial contribution to assure the financial stability of the euro bloc or make a contribution contingent upon the revision of the Lisbon Treaty to make way for a European "economic government".
German voters and even members of Chancellor Merkel's own party are reluctant to part with German money or German sovereignty. The feeling that matters are sliding out of control, even in Germany, caused the German stock exchange to drop by more than 5% today.
One reason investors treated the vote as a referendum on bailouts, was the emphasis that Merkel had given the rescue package during the campaign in no less than eight speeches.
Merkel defended her tactics: "I don't think it was a mistake to have spoken about the euro …It got very, very quiet on the market squares every time," she said, referring to her euro comments in campaign speeches. "People listened incredibly attentively... They have an interest in wanting to know what their government is doing...the euro is an emotional one for many people." Apparently they took out their emotions on Merkel and her party.
Merkel, who faces a key vote September 23 in the Bundestag on the European Financial Stability Facility (EFSF),, the financial mechanism for coping with sovereign debt in the EU, got bad news from Greece.
Greece has fallen behind its schedule for budget cuts and implementing other methods for reducing its deficit. The Greek Prime Minister George Papandreou and his finance minister Evangelos Venizelos were reported by the media to have refused to take additional austerity measures. This was denied by the finance minister, but the damage had already been done.
EU President Herman Van Rompuy, while ruling out the idea that Greece could leave the euro zone and revert to the drachma because it would create more problems than solutions, nevertheless admitted that the "financial markets see that there are still problems in the execution of budget plans in Greece and Italy. Europe must increase pressure on those countries in order for them to implement the plans they put together,”
German Chancellor Angela Merkel rejected calls for Greece to be expelled from the eurozone, saying such a course was neither feasible nor legal.
'I think that if we did, we might set off a domino effect that would be extremely dangerous for our monetary system,' she told reporters in Berlin. Merkel said what was important was that Greece carried out the promises it made to obtain emergency loans."
There is growing skepticism, even within Greece, about whether those promises will be kept.