Politics may trig­ger shift in Euro­pean eco­nomic pol­icy

Kuwait Times - - BUSINESS -

BERLIN: Slowly but surely, the eco­nomic pol­icy tide in Europe is turn­ing, and it may only be a mat­ter of time be­fore Ger­many is swept up. By adding its voice this week to the long list of in­sti­tu­tions press­ing Ger­many to spend more, the Euro­pean Com­mis­sion left Berlin look­ing more iso­lated and out-of-step than at any time since the out­break of the global fi­nan­cial cri­sis nearly a decade ago.

Pre­dictably, the Com­mis­sion’s call for a “sig­nif­i­cantly more pos­i­tive fis­cal stance” in the euro area was shot down by Fi­nance Min­is­ter Wolf­gang Schaeu­ble and the conservative media es­tab­lish­ment in Ger­many. On Fri­day, Schaeu­ble ac­cused the Com­mis­sion of over­step­ping its man­date and urged it to fo­cus its en­er­gies on en­forc­ing the EU’s fis­cal rules.

But by this time next year, the episode may be looked back upon as the first step to­wards a broader change in Europe’s eco­nomic ap­proach, away from the aus­ter­ity-first stance pushed suc­cess­fully by Berlin for many years.

This could be fu­elled by a range of fac­tors: the pres­sures aris­ing from Don­ald Trump’s vic­tory in the US elec­tion and the ar­rival of new gov­ern­ments in France and Ger­many in 2017. “We ex­pect that the Ger­man po­si­tion will grad­u­ally lose in­flu­ence,” Marco Pro­topapa of JPMor­gan said this week.

Trump’s win is es­pe­cially sig­nif­i­cant. On the one hand, it is likely to in­crease pres­sure on Ger­many to spend more pub­lic money on de­fence and se­cu­rity. On the other, it sends a pow­er­ful sig­nal to the Ger­man po­lit­i­cal es­tab­lish­ment about the dan­gers of ig­nor­ing an in­creas­ingly frus­trated un­der­class, buf­feted by the forces of glob­al­i­sa­tion, that has shown a readi­ness to vent its anger at the bal­lot box.


The loom­ing French elec­tion will be cru­cial. Cen­tre-right fron­trun­ner Alain Juppe, and his top conservative ri­vals Fran­cois Fil­lon and Ni­co­las Sarkozy, are all promis­ing rad­i­cal eco­nomic re­form if they are elected in May of next year. That could open the door to the sort of “grand bar­gain”, or re­forms-for-stim­u­lus com­pro­mise be­tween France and Ger­many, that has been talked about for years but was im­pos­si­ble with a weak, un­pop­u­lar Fran­cois Hol­lande in the El­y­see and the French econ­omy lan­guish­ing.

“We are very much in the grand bar­gain game,” an ad­viser to Juppe told Reuters.

The real game changer could be the Ger­man elec­tion in the au­tumn of next year and the fate of Schaeu­ble, the per­son­i­fi­ca­tion of Ger­many’s rule­based re­stric­tive ap­proach to fis­cal pol­icy.

The most likely out­come of that vote looks like an­other “grand coali­tion” be­tween Chan­cel­lor An­gela Merkel’s con­ser­va­tives and the cen­tre-left So­cial Democrats (SPD).

Schaeu­ble, 74, has al­ready said that he plans to run for a seat in the Bun­destag again, a sig­nal to many that he would like to con­tinue to play an im­por­tant role in the next cabi­net. But the SPD, which would prob­a­bly have first choice of min­istries in such a con­stel­la­tion, could claim the fi­nance min­istry this time around, as they did in 2005 in Merkel’s first term. That would push Schaeu­ble into an­other min­istry, blunt­ing his role as a guardian of fis­cal rec­ti­tude.

One se­nior of­fi­cial who served in both grand coali­tions said the lessons of the past years would push Merkel’s next coali­tion part­ner to take the fi­nance min­istry in­stead of the for­eign min­istry, the tra­di­tional first choice. “Re­gard­less of who that part­ner is, every­one has un­der­stood that the fi­nance min­istry has a great deal more value than the for­eign min­istry,” the of­fi­cial said.


Chris­tian Oden­dahl, chief econ­o­mist at the Cen­tre for Euro­pean Re­form, said the Euro­pean Com­mis­sion’s call for more spend­ing was un­likely to sway Ger­many. “The change needs to come from within,” he said. But Oden­dahl does be­lieve that a more vig­or­ous de­bate is de­vel­op­ing within Ger­many over the wis­dom of Schaeu­ble’s “Sch­warze Null”, or bal­anced bud­get, poli­cies.

A poll for pub­lic broad­caster ARD in Septem­ber showed that 58 per­cent of Ger­mans favoured spend­ing ad­di­tional tax rev­enues on in­fras­truc­ture in­vest­ments, com­pared with 22 per­cent who pre­fer debt re­duc­tion and 16 per­cent who want tax cuts. “If you had a dif­fer­ent fi­nance min­is­ter or if the po­lit­i­cal case for a topic-based fis­cal ex­pan­sion grew, then you could see a shift,” he said, cit­ing the mes­sages from Trump’s elec­tion. “Merkel is far too prag­matic and po­lit­i­cal to make the Sch­warze Null a pri­or­ity when there are other prob­lems to ad­dress.”

A more ex­pan­sive Ger­man fis­cal pol­icy af­ter the elec­tion may help pave the way for a tight­en­ing of mone­tary pol­icy, a step Schaeu­ble him­self has called for. The Euro­pean Cen­tral Bank (ECB), which meets next month to de­cide on whether to ex­tend its quan­ti­ta­tive eas­ing (QE), or bond-buy­ing pro­gram, has been look­ing for ways out of its ul­traloose stance. It too has called on Ger­many to grab the stim­u­lus ba­ton.

Mar­cel Fratzscher, who runs the Berlin-based DIW eco­nomic in­sti­tute and is a for­mer se­nior of­fi­cial at the ECB, says the pres­sure is build­ing on Berlin to shift its stance. His worry is that the rul­ing par­ties may end up wast­ing the fis­cal wig­gle room they have by mak­ing lav­ish prom­ises to pen­sion­ers in the com­ing elec­tion cam­paign. “I think there will be a fur­ther shift, even if Schaeu­ble stays. If the United States ratch­ets up spend­ing and this is suc­cess­ful then it would be a sig­nal,” he said. “My worry is that it could come too late, that the gov­ern­ment will have used its fis­cal space for pen­sion in­creases and tax re­duc­tions.” —Reuters

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