Germany 2020 — Part 1 - The difficulties of being an anchor of stability

One of Angela Merkel’s favourite — and most effective — claims is that the economy is “performing quite exceptionally, particularly so as this happens against the backdrop of the euro crisis”. And since external and fiscal surpluses are allowing the nation to enjoy record low unemployment with a high purchasing power, it comes as no surprise that most Germans will agree with her.

„How often did I tell the southern Europeans to save, save, save — for them to be able to buy German cars! But nobody listens to me!” © Klaus Stuttmann – Tagespiegel. www.stuttmann-karikaturen.de, www.tagespiegel.de.

But Angela and her fellow CDU candidates have been very careful not to project this economic narrative into the future. A 2020 scenario would show a different picture: a number of medium-term structural challenges that could put at stake Germany’s future as a manufacturing powerhouse, its surpluses and innovation advantage.

And this is not just experts’ stuff. Germans are very aware of the issue, despite Merkel’s invite to weigh in the positives. “When are you coming back, Frau Merkel?” writes Lutz Wendorf, a construction professional. “Our roads, bridges, rails, schools and hospitals are badly in need of refurbishment, but there are no means left [for public investment]. All around us we see a broken economy”. Overdone? Probably, if one looks at Germany through the lens of some crisis-struck peripheral economy.

Nonetheless, as is the case with other key economic issues, OECD, IMF and many analysts houses confirm an investment rate below OECD average. The bulk of resources, as is well known, went abroad — read southwards or eastwards — in the form of capital goods. But insufficient investment spending is just one of the key economic priorities German conservative politicians are trying to downplay, and the opposition — SPD, Grünen, and Linke — keeps bringing up. These Germans are crazy, one could say, to have focused so obsessively on exports, forgetting that their much trumpeted competitiveness will depend primarily on their ability to iron out rigidities in their not reformed service labour market, define a follow-up policy for the energy sector after the decision to phase-out nuclear, put in place long-term policies to avoid a critical shrinking of their labour force, and help indebted European countries put their house in order and resume growth.

The latter has notably been at the centre of a fierce “austerity” debate across Europe. The once “sick man” is now perceived by the non-core European countries as having the fingers on the financial button, even if in the case of Portugal and Greece, it was the Troika — IMF, EU and ECB — who demanded austerity measures and reform in exchange for bailout programs. Daniel Gros, Director of the Centre for European Policy Studies, recalls that in the case of Spain and Italy, the governments determined politically the pace at which to impose austerity. “But Germany will always be perceived as the country that commands” said Gros speaking to East, “also because the media likes this narrative: it can be picked up easily even if reality is different. Austerity always involved huge social costs, but is unavoidable when a country has lost the confidence of its foreign creditors. The external fundamentals of the Eurozone periphery are now improving rapidly. In this sense, austerity has done exactly what it was intended to do.”

So why would the German finance minister Wolfgang Schäuble eschew the topic, as he has done over the last few weeks? After all, the very last data shows that Greece’s GDP shrank less in the second quarter than in previous ones, and bailouts cost German taxpayers up until now around €210 billion in loans and guarantees (Bundesregierung data), but no real cash. But the euro zone debt crisis is anything but over, as the last days’ headlines about Italy, Spain, Portugal and Greece indicate, and Schäuble finally admitted last week to the possibility that a third Greek bailout might be needed, carefully avoiding though the word “restructuring”.

The incumbent government is well aware of the need for Germany to play a key role in finding sustainable solutions to the euro area debt crisis, which would in turn reduce policy uncertainty and bring more stability to German long-term investment decisions. The country stands to benefit greatly from a reduction in uncertainty and a better functioning EMU. Nonetheless, talk about this sensitive topic is materializing fears about the T word — a Transferunion that would have the German taxpayer bear the burden of bringing the peripheral economies back on their feet.

Some commentators believe that once the elections are over, the German government is likely to relax reform programs put in place in debtor nations, and focus on their need for growth and job creation. “All Greek debt restructuring will result in a Transferunion,” insisted Mechthild Hinke, sharing the view of some CDU voters that could bear a surprise for the leading party.

“They are searching desperately for new sources of financing to conceal the disaster that is going on. And as the no-alternative CDU motto goes, ‘this will continue…’ Unless people vote differently on the 22.9!”, commented Peter Lücke, a middle-aged technician, who campaigns, like Hinke, for Alternative for Germany (AfD), whose leader, Bernd Lucke, believes that southern countries should be forced out of the single currency.

Some surprises already struck: a survey commissioned by ARD’s Maybritt Illner popular political show , revealed that up to 20% of the left vote could go to AfD as well, allowing it to overcome the 5% hurdle, and introduce a wildcard in the coalition game.

GUALA