German Policy Watch

August 28, 2012

Sceptical tone of debate does not signal euro-fatigue in Germany

• Summer recess in Germany has been dominated by the negative comments of policymakers regarding the current state of euro crisis management, the Italian and Spanish commitment to reforms, Greece’s future in the euro area and a perceived shift in ECB policy. Uncertainty regarding the Constitutional Court’s ruling is adding to concerns that Germany’s political and societal support for the euro is eroding.
• This debate, however, should not be taken as an indication of Germany distancing itself from stabilizing the euro or making further progress on integration. Rather, it is occurring against the backdrop of the looming federal elections in autumn 2013. The German government’s commitment remains strong. Incremental steps in euro crisis management are still seen as the appropriate strategy.
• While euro crisis management has so far been a joint undertaking by the ruling coalition and the major opposition parties, parliamentary cooperation will become more exposed to political bickering. The opposition will attempt to position itself as providing an alternative in European policy (and other economic issues) although there are no differences between the parties in principle and Merkel’s course enjoys broad support in the electorate. Also, the junior coalition partner will try to raise its profile. A lot of political noise will divert attention from Germany’s constructive stance in European policy.
• Given Germany’s pivotal role in Europe and in euro crisis management in particular as well as the dynamics of a pre-election environment this newsletter will be an ad hoc source of deeper insights into various political and economic issues that influence German political life – or the perception of it.
   

As usual, the summer break provided a good platform for policymakers to present their opinions on various issues, above all the risks regarding Greece and the scale of assumed fiscal liabilities arising from the EFSF/ ESM rescue mechanism and Target2 imbalances. Most of these policymakers came from the state level, apart from Philipp Rösler, chairman of the Free Democratic Party and Federal Economics Minister, who discussed a Greek exit. This should not be taken as the official line, though. Finance minister Schäuble remains reluctant to talk about Greece leaving the euro area and criticised economists’ calculations of bearable costs of a Greek exit as one-sided. While resistance to extending the Greek programme seems to be increasing in Germany’s Bundestag, which has a say on both the disbursement of the tranches of the current programme as well as on the allocation of additional funds to support Greece, the final German position will not to be decided before the Troika reports back from Greece and the Constitutional Court has ruled on the ESM.

The upcoming ruling of the Constitutional Court expected on September 12 has imbued markets with a sizeable degree of nervousness. It needs to be understood by foreign observers, though, that almost every ratification of major European decisions on the euro by parliament has been accompanied by complaints being filed with the Constitutional Court, and that the Court has, however, taken a constructive pro-European approach. Thus, even if the ESM should be deemed broadly in line with the German Constitution with regard to the line of arguments put forward by the pending complaints – the scenario we expect – other similar complaints will follow. To a certain extent the Constitutional Court provides a platform for expressing opinions critical of Euro(pean) policy that have hitherto not been adopted by the mainstream parties. The Court in general, however, enjoys a strong reputation among the German population: a recent poll just revealed that 68% of Germans welcome that the Court is looking into this issue of ESM and 71% want to see the Court closely monitor the transfer of sovereignty to the European level. Apart from the narrow ESM issues we also expect that at its main hearing at the end of 2012 or in early 2013 the Court will issue some statements on the repercussions of further European integration on the German constitution or, the other way round, how far the constitution can be stretched by further integration steps before it needs to be changed – be it in a political process or with a referendum (which would be the first one at the federal level).

The current political debate occurs against the backdrop of the parties positioning themselves for the run-up to the federal elections in September 2013 and important state elections in 2013, too. The parties’ differences on more general issues such as taxation, social and labour market policy or energy are substantial at the moment and will not only impact on the overall outcome of the elections but also on the arithmetic of coalitions. While the opinion poll ratings for Merkel and her CDU/CSU are constantly in the mid-30s, none of the traditional coalition groupings would so far be able to win a ruling majority. One of the reasons why is that it is difficult to predict the performance of smaller parties, ranging from the junior coalition partner FDP, the well-established Green Party or the Left to newcomers such as the Pirates. Also, it cannot be ruled out that mainstream parties will adjust some of their traditional views to smooth the way for new coalitions.

Although the parties have not yet determined their campaign strategies the major topics are already in the offing. While the CDU will set the tone on issues important for the economy and business and leverage chancellor Merkel’s remarkable popularity the SPD is likely to focus on social justice and stricter regulation for financial markets and banks. The final orientation of the SPD will certainly also be influenced by which one of its frontmen in the troika it nominates as candidate for chancellor. Taxing the wealthy and the related redistribution issues will sharpen the electoral debate.

For the very first time European policy and the future course of integration might become an election campaign topic, something not even seen in the context of the introduction of the euro back in the 1998 election. However, the parties will have a hard time playing this card and presenting both coherent and distinctive positions to their respective electorates. The coalition partners harbour inner-party opposition to the bail-out approach, which has been reflected in the increasing number of dissenters in recent Bundestag decisions. This may not only cause Merkel trouble given the various imminent decisions to be made, but will complicate the process of devising a focused election strategy. In the FDP, for example, parts of the current leadership present the party as being critical of bail-outs – which has so far failed to generate an increase in voter support – while others intend to launch a pro-European initiative or even call for a banking licence for the ESM. The Social Democrats are seen by foreign observers as being more inclined to a fiscal union defined as a transfer union with debt mutualisation. However, a closer look into the position papers and statements reveals that they, too, insist on the link between introducing any debt mutualisation instruments and the transfer of fiscal sovereignty as well as more federal control over national budgets. The Greens are the party being most supportive of further integration steps, whereas the Left rejects any of those ideas focusing on a stronger nation state.

Thus, even though the tone of the parties’ arguments may sound different, there is no real difference in principle between the mainstream parties, the government and the opposition on European matters. Germany’s political approach towards European integration has been shaped by governments of different political colours and is expected to prevail during and after the euro crisis. As in the past, Germany prefers and chooses “more Europe” if established practices do not work any longer. Maintaining the policy pursued during the negotiation of the Maastricht Treaty between 1988 - before unification - and 1991, Germany is committed to the stabilization, evolution and strengthening of European Economic and Monetary Union. This stance also enjoys the broad domestic backing of political parties, interest groups and public opinion. Once again, this accords with Germany’s very solid economic and financial interests in a functioning European (Monetary) Union. It is based on considerable political and economic leverage in intergovernmental negotiations on the distributional specifics of crisis management, prevention, governance and policy developments. As in the late 1980s, policy is guided by the conviction that stronger institutional arrangements (more credible commitments, tighter monitoring and enforcement, stronger and more independent institutions) at the federal or intergovernmental levels shaping euro-area member states’ fiscal behaviour, economic management, financial supervision and democratic legitimacy are indispensable for putting the euro on a sound political, economic and democratic footing. This line of reasoning was present at the creation back in Maastricht, but then Germany did not have the scope, determination or domestic policy leeway (unification) to pull partners uphill on the road towards deeper political union.

The economic and funding crisis in many euro-area member states is clearly not yet under control and will require additional crisis management measures. Given the high stakes involved, Germany is likely to stick to its course of providing as much financial relief and political support that is required to contain an escalation of the crisis in exchange for continued commitments to reform, adjustment and institutional improvements in the crisis countries, while carefully limiting the upside risks to its financial commitments that are already very large in absolute and relative terms. Going forward, a stronger EMU will have to include decisive elements of financial markets, fiscal, economic and political union to survive. Rather than managing dissolution and disarray the German body politic prefers advancing towards “more Europe”. It needs to convince the electorate, though, which is fundamentally more pro-European than those in other E(M)U member states but whose convictions have been cast into doubt by the economic and political differences that have become apparent during the crisis. The case for greater integration must therefore be spelled out publicly in full by many German and European political actors over the next few months.

Authors:
Barbara Böttcher (+49 69 910 31787, barbara.boettcher@db.com)
Klaus Deutsch (+49 30 3407 3682, klaus.deutsch@db.com)