IT MAY be simplistic to claim that the German elections on 22 September will determine the future of Europe and the euro, but in many ways both are at the end of a very long road.
What will Germany’s new coalition look like? Will we see a renewed mandate for the alliance between Angela Merkel’s Christian Democrats and the Free Democratic Party, or a return to a grand coalition between Merkel’s bloc and the Socialists? Either way, Germany must step up or down to a flurry of vital decisions in the fourth quarter.
Both Greece and Cyprus must be addressed, while Portugal will likely need additional financing. We can add to this a business cycle that will reveal further weakness when the apparent “green shoots” seen this summer prove to be a false recovery. Europe faces an unavoidable truth: low growth, rising unemployment and an ageing population can’t be escaped easily, and certainly not with frozen credit markets, and a lack of productivity improvements or structural reforms.
Nowhere are Europe’s hidden troubles clearer than in Germany, where one of the major focal points in this election has been the 7m “working poor” – workers who can’t cover more than basic needs. Germany is the richest country in Europe, yet faces huge social and economic challenges, even if its numbers appear robust in aggregate.
The realisation of Germany’s predicament is the main change to the nature of this crisis. From 2009 to 2012, it was mostly a Club Med crisis. But since the end of 2012, it has stormed through historically strong northern countries, like Germany, the Netherlands, and Finland. Germany has outperformed, but the ranks of the working poor are a sign of a sluggish, not vibrant, economy. This should give further impetus to Germany’s need for change.
Yet Germany is a reluctant leader. One of Merkel’s predecessors, Helmut Kohl, was once proactive in Europe, shedding tears as he held forth on the “House of Europe”. But the rot set in when Kohl bent to France’s demand to delay the implementation of the Maastricht disciplinary stability and growth pact. Thomas Mann said after the Second World War that “we want a European Germany, not a German Europe”. Now, thanks to Kohl giving in and Merkel’s lack of interest in the European vision, we have a Europe that never established a proper foundation. Europe needs a stronger commitment from Germany, but has a leader that does not want to bear the responsibility for making important decisions.
Merkel’s relationship with Europe is passionless – a question of euros and cents, with her actions increasingly aimed at domestic considerations. Add the fact that she quotes the philosopher Karl Popper, who promoted the idea of piecemeal social engineering and dictated that change should only be done a little at a time, and a picture emerges of a Chancellor who is more comfortable with economic briefings than defining major change to a political and social agenda. Her favourite statistics tell us more: Europe is 7 per cent of the world population, 25 per cent of global output and makes up 50 per cent of social welfare. It’s not just about how the pie is divided, however, but about growing that pie.
The likely new German government under Merkel will not change its course voluntarily. The fundamental situation will make the change on its behalf. Germany is growing old faster than most countries, it has rising social tensions, and an export industry that is facing headwinds as success stories like Asia are coming in for a dramatic slowdown.
I would not be surprised to see Germany flirt with zero growth next year, and this will be the true test. When a country’s tail-wind turns to a head-wind, it’s good to have a plan or a vision, otherwise you become a rudderless ship. It’s time for Merkel to realise that former Chancellor Helmut Schmidt was wrong when he said: “People with a vision should go see a doctor”. Germany needs a vision for Europe as well as for Germany. Otherwise it will leave the country much worse off – even in Merkel’s euros and cents.
Steen Jakobsen is chief economist at Saxo Bank. He will be discussing these issues on 13 September at Saxo Bank’s #TradingDebates – The end of the euro as we know it. Other speakers include Ukip leader Nigel Farage, Saxo Bank co-chief executive Lars Seier Christensen, and former President of the Czech Republic Vaclav Klaus. (www.tradingdebates.com).