Merkel III aims for Europe

On the eve of the Bavarian elections, the brilliant German political analyst, Ulrike Guérot, until recently Head of the European Council on Foreign Relations’ Berlin office, confessed she expected a landslide victory for the Christian Democratic Union/Christian Social Union (CDU/CSU) and a collapse of the FDP to below the 5% threshold… 

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This result, she thought, would induce CDU leaders to spur their electorate to ensure that the Liberals gained access to parliament, enabling Angela Merkel to govern another four years without having to yield any quarter to incompatible ideologies. This fascinating (if cynically determinist) prediction was not entirely fulfilled due to the wisdom of the electorate which, in key moments, somehow always manages to send an unequivocal message. In this instance, the Germans gave the Chancellor an ‘almost’ absolute majority in the subsequent national vote, acknowledging that her ability and caution have allowed Germany to sidestep the economic crisis with much lower levels of unemployment and stronger industrial production than in the rest of the EU, thanks mainly to the inroads its products have made in EU markets which, according to official statistics, absorb 69% of its exports. The German electorate however did not back the CDU’s traditional Liberal allies (though it can’t be said Merkel has seemed particularly fond of them) whose support collapsed, forcing the Chancellor to strike an alliance with her lifelong adversaries, Peer Steinbruck’s Social Democrats (SPD). Many people have interpreted Merkel’s repeated affirmation that she does not intend to stand for a fourth term in national government as an investment in a wider vision, a kind of down payment on a mandate as President of a stronger and more enfranchised European Union. As a matter of principle, I take these futuristic interpretations with a pinch of salt, but we should all be intrigued by the prospect of having Merkel sent to Brussels by the European electorate in four years time. Let’s see why this is not an unlikely proposition. A fully self-sufficient economic policy is unfeasible for Germany, as the majority of German industrialists have been saying for some time. The single currency has certainly strengthened what was already the strongest economy in Europe, but now the euro needs to be equipped with the necessary institutional infrastructure to become a real asset for the competitiveness of European companies. Merkel has spent the last few years convincing us that a Banking Union, a common economic policy throughout the EU, a European Minister of Finance and the mutualisation of debt are not heresies, but rather the natural evolution of a Federation of States that inevitably tends towards greater political union. Let’s focus on the mutualisation of national debt for a moment, an idea that seems unpalatable for the majority of the Chancellor’s supporters today. An analysis by two German economists, Stefan Moog and Bernd Raffelhüschen, approaches the question by adding potential future passive liabilities (“implicit” debt) to so called “explicit” public debt accrued in the past in order to come up with a more accurate forecast for the next ten years. This is where the surprises begin: Italy of all countries has by far the lowest implicit debt in Europe, so much so that based on the sum of explicit and implicit public debt it is at the lowest end of the debt charts. If both figures are taken into account, the Italian debt stands at 146% of GDP, compared to 193% for Germany (in second place) and progressively rising to astonishing  four-digit numbers for Greece (1017%), Luxembourg (1116%) and Ireland (1497%), at the top of the chart! How is this possible? Key factors affecting the comparison between Italy and Germany - just to take the most surprising example - include public funds used to bolster the banking system during the crisis (250 billion euro in Germany as opposed to 4 billion in Italy) and the reform of the pension system. Indeed, as previously mentioned, the International Monetary Fund forecasts the discounted cost of Italy’s pension funding to drop by 34% by 2050, compared to a rise of 30% in Germany (+13% in the UK and as high as +38% in the USA), dramatically widening the gap between the two countries. Facing the markets with a concentrated debt, which for the entire euro-zone would represent 88% of its GDP (the figure for the US is 101%), would make Europeans more competitive in terms of the EU system as a whole. Merkel seems to have understood this economics lesson, and with her recent electoral result, she may soon be ready - having already conceded a European Central Bank independent of the Bundesbank – to back the creation of a single, European- level Finance Minister in Brussels coordinated by an authoritative European President, a role that only she can fill today. We need to make proper use of the next four years of her legislature to strengthen European institutions so that they are prepared to take such a significant step. This calls for courage, and there’s no time for second thoughts.

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