In this recent essay, frequent AICGS contributor and Peterson Institute for International Economics Senior Fellow Dr. Jacob Funk Kirkegaard highlights the general consensus on economic policy issues that matter to Germany’s European partners. This article originally appeared on the Peterson Institute’s blog “RealTime Economic Issues Watch.”
Elections are interesting when they highlight dramatic choices between policy options and approaches to governing, and when they bear consequences for other countries. Neither is the case for Germany’s elections on September 22, despite Germany’s status as Europe’s undisputed political and economic leader. The political difference between the center-right Chancellor Angela Merkel and her center-left challenger Peer Steinbrück on the things that matter to them is trivial, most especially their policies on the euro area crisis and Germany’s export-driven economic model.
Since the euro crisis began in 2010, Merkel’s policies have enjoyed support in the German parliament from the opposition Social Democrats (SPD) and Green parties. If, as expected, Merkel wins a majority for her current coalition in the lower house Bundestag, the German upper house will remain controlled by the SPD and Greens. An SPD-led government would not deviate materially from Merkel’s popular euro area policies in any case. Whatever happens, Germany will remain de facto governed by a grand coalition on European and international economic issues.
But the election matters for Germany’s domestic bread-and-butter economic issues, and for European politics in the longer term. Germany’s recent record employment gains and balanced government budgets have been achieved, after all, at least partly at the expense of increased inequality in Germany. The SPD may not be able to criticize Angela Merkel for her economic results, but for their presumed costs to social stability. Merkel has adopted several traditional SPD and Green policies, such as endorsing minimum wages in more sectors of the economy and phasing out nuclear power, but economic fairness and equality issues have been the Social Democrats’ main campaign focus. A look at the SPD governance proposals for 2013–17 indicates policy area priorities for the center-left:
Minimum Wages. The SPD proposes to introduce a federal minimum wage to all economic sectors for the first time. That wage would be €8.50/hour. Previously, minimum wages have been locally agreed in some sectors by certain social partners. Only a few sectors (like the construction, cleaning, painting, and roofing industries) have had minimum wages set by the German government. Reforms introduced by former Chancellor Gerhard Schröder in 2003–05 established a new downward wage flexibility in Germany, increasing the number of very low-wage German jobs. The suggested minimum wage for Germany would be equal to $10.20 in the United States, 40 percent higher than the $7.25 current U.S. federal minimum wage, and 13 percent higher than President Obama’s proposed U.S. minimum wage of $9/hour. The SPD says its proposal would raise wages for 6.8 million Germans, about 17 percent of the total employed. At €1,350 per month,1 the proposed German minimum wage would be lower than the minimum in France, Belgium, and the Netherlands.
Old-Age Pension Benefits. The SPD proposes a minimum pension benefit of €850/month for people with long contribution periods at low wages, and a full pension for people with 45 years of contributions at age 63. These proposals, incidentally, underline how far the French public pension system is from the euro area mainstream. President François Hollande recently suggested trimming French pensions a bit, but under his proposals the French would still have access to a full public pension after just 42 years at age 60—or after three years less work than what the German left seeks.
Taxes. The SPD wants to raise the top marginal German income tax rate to 49 percent for incomes over €100,000 (€200,000 for couples), and lower German electrical power taxes by 25 percent. While reducing inequality somewhat, these proposals would hardly usher in a revolution. They would boost domestic consumption marginally, not materially changing Germany’s external surplus position. Ironically, Merkel’s government has failed to build on Schröder’s earlier overhaul of the German economy, leaving the country less resilient than is often assumed because of its failure to free up domestic services, boost education, and renew public infrastructure.
A Merkel return as Chancellor would likely end the political career of the 66-year-old Steinbrück, as well as the two other members of the party’s leadership troika: party leader Sigmar Gabriel and parliamentary faction leader Frank-Walter Steinmeier. A likely generational turnover would elevate some of the SPD’s current vice-chairs: Lord Mayor of Hamburg and former Federal Minister of Labor and Social Affairs Olaf Scholz, or Hannelore Kraft, the State Premier in Nordrhein-Westphalia.
Only 59 years old and very popular personally, Merkel faces no pressure to retire from politics even in the medium term. She could even fight the next scheduled election in 2017. Her rivals in the Christian Democratic Union (CDU) have been sidelined or engaged in self-destruction. In fact, her dominance and recent losses of power at the German state level have left the party short of younger talent, a serious long-term problem. Were she to lose, the CDU would face a serious leadership vacuum.
Some uncertainty remains, not over Merkel’s likely victory, but over the formulation of the next governing coalition. Overt single-issue euro-skeptic parties are not selling well, however. The anti-euro AfD (Alternative für Deutschland) party has failed to poll more than 3 percent of the vote, short of the 5 percentage point threshold for Bundestag inclusion. This should serve as a rejoinder to the English-speaking commentators who have predicted that the German taxpayers will rebel against the euro area bailouts, causing renewed crisis in the euro area. It is too early to write off AfD as an electoral presence, or a factor influencing the CDU/CSU and FDP to adopt a more anti-bailout position. But this is now an unlikely outcome as the euro crisis has stabilized.
What is historic about this election is easy to overlook. The results are certain to vindicate Merkel’s crisis response in the euro area—demanding economic reforms as a condition of German financial solidarity with troubled countries. The broad spectrum of parties that support this basic approach will be overwhelmingly returned to office, cementing the “IMF model” of reforms in return for aid in Europe. Variations of this model, which include the European Central Bank’s outright monetary transaction (OMT) program for “lender-of-last-resort support” from the central bank will be relied upon even more in the future.
This reality will likely permeate the coming negotiations over centralizing bank supervision in Europe, particularly the establishment of a single resolution mechanism (SRM) for dissolving failed banks and for setting up an integrated deposit insurance scheme in the euro area. Germany is now refusing to countenance a wholly integrated single euro area deposit insurance fund. It would prefer to rely on national deposit insurance funds that could provide loans to each other in a crisis. But this opposition means that in the next crisis, Germany could inject “political conditionality” on such loans to other members’ deposit insurance schemes. The single deposit insurance fund could then become the functional equivalent to the OMT program, in which conditions are imposed before the ECB steps in. This doesn’t mean that financial assistance related to deposit insurance cannot flow across borders. It merely reflects the political reality that conditionality is necessary to make rescues legitimate and electorally sustainable.
Many will undoubtedly lament this situation and complain about the slow, cumbersome, and politically charged process of European integration. But the election shows that for all its problems, the common currency can sustain itself politically. However distasteful or messy, political conditionality is inevitable in the creation of a monetary union with sovereignty remaining at the member state level for fiscal policy and government revenue collection. Only when a more integrated political union is achieved can political conditionality be fully dispensed with in euro area financial assistance.
1. Assuming 40 hours per week for four weeks a month.