Thursday, September 26, 2013

Merkel and Europe

Will Germany change course on austerity after the elections? The German news media is divided on the issue. But, Merkel's next coalition partner will either be the social democrat SPD or the Greens, both want a less austerity and both want eurobonds.

The SPD will most likely be the junior partner in the next government. In the party program (German pdf) they argue that "reforms" should be accompanied by investments. In addition they want a European debt-repayment-fund. In this scheme all debt above the magic Maastricht 60 percent threshold of every eurozone government would be moved to the fund. Eurobonds in disguise one might say, but with a big caveat because no program country could participate according to the current plan, which makes it pretty much pointless, except for Italy. If Spain, Portugal, and Greece could take part in such a scheme, then we might actually see a workable solution.

So, in theory a government in which the SPD is junior partner should act much more rational towards reasonable answers. Additionally, Schäuble will most likely not be part of the next government since he is already 71 years old. Will the new finance minister be able to understand that a policy which caused mass unemployment is not a success just because of one less awful quarter? Schäuble has clearly proven that he does not understand all that well in his recent FT op-ed, were he pretended that austerity was a huge success. Steinbrück (SPD), who said that he would not be part of a "grand coalition", was finance minister during the beginning of the crisis. He was largely responsible for policy decisions like the extension of the Kurzabeit scheme (short work), and the German "clash for clunkers", which helped Germany to overcome the crisis faster than other European countries. It is at this moment unclear if Steinbrück will stick to his promise from before the election or not, but t seems likely that the SPD demands to lead the finance ministry (relevant for Europe), while the Union will take economics (much more domestic).

Merkel has shown time and time again that she can be very flexible, even when it comes to questions that touch core party believes. Her fast evolving stance on nuclear power after the Fukushima disaster can be seen as a prime example. She is pragmatic, and perhaps more interested in power itself than to what end that power should be used. Her party has followed suit without making much fuss. Spiegel recently argued that Merkel might significantly change course in the future; and tries to explain why "the Europeans could love Merkel in the end". The left wing TAZ says that the worst chancellor since the war will keep the foundation of her policy intact. The Zeit believes that a grand coalition would be much more forward-looking, because Merkel would not have to focus on trying to appease dissenters in the next coalition.

But, they wont be all gone. The CSU, the Bavarian sister party of Merkel's CDU, will of course be part of the next government. They are, well, special. One could argue that they are similar to the tea party on social policies, but the party seems to be completely void of any economic believes. Well, they wanted that Greece should sell islands, as if that would have solved anything. Other than that they don't feel comfortable with the rescue policies, but they have a hard time to offer specific solutions. On their homepage when clicking on policy, one reads this:

What we care about


The party is against Europe as a country; and feel that eurobonds would bring us closer to such a state, therefore they oppose them. Typically they talk much and loudly, but nobody really cares about them outside of Bavaria, since they follow Merkel in the end. In a grand coalition their votes would not matter, so let them talk.

A Union Greens coalition could also happen. Here the CSU would be much more powerful. The CSU flatly ruled out being part of a black green government. They are special. Of course, in such a coalition they would have to act responsibly, perhaps party leader Seehofer is opposed to that notion. The Greens have follow a similar economic policy as the SPD, so most of what was said above would still remain intact, but the Greens would be nowhere near as powerful as the SPD.

The looming center-left majority in the Bundestag, will push Merkel further to the left. The SPD is in favor of eurobonds, which in the form (if Spain, Portugal, Greece and Ireland are also included) discussed above could actually help ease the crisis. Also, as we have seen in Portugal reducing the negative pressure from austerity will lead to significant growth; and it will do so fast. In April the Portuguese constitutional court ruled many parts of the austerity there unconstitutional and the country had the strongest quarter of all eurozone states.

Still, significant downside risks remain. Germans will see that there is no free lunch rescue. The banks are not fixed. The last grand coalition followed the believe that each country should deal with their own banks. The next one will have to act in the opposite direction.  The German Constitutional Court could possibly in the next few weeks rule out the participation of the Bundesbank in the promise (ECB OMT program) that is currently keeping the crisis quiet; and in the US crazy people seem to have taken over control of congress. So if things go badly, even before the next government is formed, the crisis could be back; stronger than ever. If everything remains quiet for a few more months then there actually is a chance, that the next German government will become a positive force, eventhough it will largely be consisting of the same kind of people that failed miserably for the last four years.

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