Friday, April 18, 2014
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The European Consequences of Germany’s Election

ISTANBUL – Nearly a century ago, in 1919, John Maynard Keynes analyzed the economic consequences of the peace following Germany’s defeat in World War I. To be sure, the consequences of Germany’s general election on September 22 will not be nearly as momentous. But the outcome will not be as inconsequential as most analysts currently claim.

For starters, even if the current Christian Democratic Union (CDU)-Free Democrat Party (FDP) coalition forms the next government, Chancellor Angela Merkel could make longer-term and more courageous decisions without having to worry about the immediate electoral impact. She would be able to pursue a two- or three-year program, instead of her current four-week strategy.

Merkel’s post-election agenda might still be very cautious, emphasizing medium-term fiscal consolidation for Germany and the eurozone as a whole at the expense of boosting employment and growth. But a re-elected Merkel would no doubt be willing to proceed, at least by small steps, on the creation of a European banking union, including a resolution mechanism that draws on eurozone-wide resources.

Moreover, even if Merkel leads the same political coalition, she would more strongly support eurozone schemes to encourage lending to small and medium-size enterprises, and European Union education programs, such as Erasmus. She would also be willing to work on institutional reforms aimed at closer coordination of EU member states’ economic policies.

Finally, even within the CDU-FDP camp, there is growing recognition that Germany’s enormous current-account surplus – above 6% of GDP and the world’s largest in absolute terms, at about $250 billion – means that Germans receive almost no return on about 25% of their savings. Somewhat faster demand growth in Germany and a lower external surplus would help not only Germany’s trade partners, but also German savers.

Of course, the CDU-FDP coalition may not be returned to power. The other post-election scenarios are a grand coalition between the CDU and the Social Democratic Party (SDP); a red-green coalition between the SDP and the Greens (if both do better than predicted and the liberal FDP falls below the 5% electoral threshold), possibly with tacit support from the left-wing Die Linke; or a CDU-Green coalition.

In all three cases, the government would be more oriented toward European and eurozone integration than a renewed CDU-FDP administration would be. True, the German Constitutional Court has ruled out open-ended financial commitments over which the German parliament has no control, so Germany can go only so far in support of greater economic integration without greater political integration. But a government that includes the SDP or the Greens would contain at least one party that is ready for more significant steps toward a quasi-federal eurozone featuring elements of fiscal union (though limited for the sake of constitutional compliance).

Both parties are less complacent than the current government about the eurozone’s stability and Europe’s growth prospects. And both believe that there are too many low-paid marginal jobs in Germany to justify glowing reports about the quality of employment; that income growth is too slow and accrues disproportionately to the wealthiest; and that somewhat greater eurozone solidarity is in Germany’s own long-term interest.

The German election will not produce a political earthquake and will not suddenly open the door to a federal Europe on the model of the United States, with large implicit fiscal transfers and highly centralized defense and foreign policies. But, at a minimum, the outcome is likely to speed up implementation of eurozone decisions that have already been made, leading to somewhat more expansionary economic policies in both Germany and the eurozone.

A government that includes the SDP or the Greens – both of which have egalitarianism and internationalism in their DNA – would almost certainly go further and embrace substantial reform, renewal, and strengthening of eurozone institutions as a medium-term target. Such a government would back a eurozone strategy, led by Germany and France, that focuses on growth and employment, which would infuse some constructive enthusiasm into the 2014 European Parliament election.

A German government coalition that includes the SDP or the Greens (now a central player in German politics) could thus accelerate the reform and integration that the eurozone needs. That would enable Europe, now with the full support of Germany, to recover more rapidly from its economic malaise and to take on the global leadership role that has eluded it for so long.

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  1. CommentedMarco Cattaneo

    The Europe monetary system has to be thoroughly reformed. "More Europe" will never work, reintroducing monetary autonomy on a country by country basis is the only sensible way to go. http://bastaconleurocrisi.blogspot.it/2013/09/certificati-di-credito-fiscale-ccf.html

  2. CommentedKir Komrik

    Thank you for this very important set of observations,

    You wrote:
    "The German election will not ... suddenly open the door to a federal Europe on the model of the United States, with large implicit fiscal transfers and highly centralized defense and foreign policies. But, at a minimum, the outcome is likely to speed up implementation of eurozone decisions that have already been made, leading to somewhat more expansionary economic policies in both Germany and the eurozone."

    I find their lack of audacity disturbing. Europe, imho, and for its sake, should move to a true federal system yesterday. In particular, they need a Euro that is fully backed by rule of law, not the half-baked backing it has now. This is a key deficiency that needs fixing very quickly, imo. Monetary policy must be uniform and if for one then for all equitably. This kind of assumes a more central authority and role for the ECB as well.

    The EU needs a stronger executive yesterday, imho. And it needs a fundamental law ratified by all the states because that is the core of the very meaning of rule of law. It all starts there, even if it is just parchment. What they have now won't pass for an articles of confederation, much less any real fundamental law.

    I see serious risks for Europe the longer it continues down a path without these key innovations and related institutions, and I cannot stress that point enough. It is a durability issue. "Nations" moving in the kind of treacherous waters the EU is in right now, half-cooked, not done and sloppier by the minute, tend not to last long.

    Finally, and imo, the financial crises cannot be competently managed until the EU reaches a truly federal form, particularly the advances in the monetary system I described.

    - kk

  3. Commentedhari naidu

    Your assumptions are all false because 22 Sept will most likely produce a SPD Chancellor - without CDU (Merkel).

    Then what?

    BTW Berlin decision-makers during Euro crisis are on both sides of the aisles Libertarians!

    1. Commenteddalai guevara

      hari, forgive me for assuming you are not a betting man, because if you were and you were putting your money where your mouth is, I would happily bet any amount of your choise that you are wrong.

  4. CommentedFrank O'Callaghan

    the issue is not one of national redistribution from one country to another but of the gross enrichment of the few at the expense of the many that has happened over the past 30 to 40 years. Without reversing this inequality there is no solution.

    Germany has benefited from the euro to a huge extent but is unwilling to carry it's costs. This is not surprising. The countries that have suffered from the euro were run in such a manner that those in control passed the benefits to their "friends" while indebting the state.

    During this "crisis" the rich have become very rich and most others have or will become poor.

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