In Defence of Mrs Merkel

Daniel Crump 

Image © World Economic Forum

Back home in France, the election of Mr Hollande was hardly an occasion for national pandemonium, despite the usual clever camera shots to suggest otherwise. The French election has been dubbed by many in France as the day Sarkozy was defeated, rather than the day the French Socialist Party rose from the flames. The man they nicknamed ‘Mr Normal’ was, in many respects, the alternative to President Sarkozy, and not much else.

In Europe, however, he is firmly in the driving seat of the latest popular craze; all aboard the Anti-Austerity bandwagon! He has picked up some notable hitchhikers along the way, including Italy’s un-elected Prime Minister Mario Monti, who has taken a seat beside the un-elected Greek Prime Minister Panagoitis Pikrammenos. The most significant of these gentlemen is US President Barack Obama. In the past days he has been quoted as saying ‘’a responsible approach to fiscal consolidation should be coupled with a strong growth agenda’’. The bandwagon is now full to capacity, and carries the leader of the free world, probably riding shotgun. It is also travelling at alarmingly high speed straight towards Mrs Merkel and her Christian Democratic Union led coalition in Berlin.

Supporters of Hollande, and his merry men, are even claiming that the CDU’s poor performance in North Rhine-Westphalia last week is an indication that Merkel’s own citizens are turning away from Germany’s policies on the continent. This would be a slight misconception. According to the Economist, 82% of voters said that state matters were paramount, and that the CDU’s performance was mostly to do with former environment minister Norbert Rottgen, who failed to say whether he would stay in Dusseldorf to lead the opposition if he lost. He was simply no match for the campaign led by a minority SPD-Green coalition, which has held NRW since 2010.

Mrs Merkel remains Germany’s most popular politician, largely thanks to the German economy. German GDP expanded by 0.5% in the first quarter of 2012, and has kept unemployment well below the EU average. They have done this with the help of their much coveted ‘Mittelstand’ economic system. This comprises a group of small and medium sized businesses that cluster themselves around big manufactures and work closely with Universities and researchers. It is the perfect complement to Germany’s love of apprenticeships, which helps to keep the flow of qualified workers pouring in. Unsurprisingly, Germany is seen by investors and financial markets as Europe’s safe haven, keeping the cost of borrowing to below 2% for 10 year bond yields. 

An unfortunate side to the pro-growth movement in Europe is the corresponding resentment towards Mrs Merkel herself, turning anti-austerity into anti-German sentiment. A common feature of Greek protests is the sight of German flags set ablaze and the inevitable depiction of Merkel in a Nazi Uniform. Even Merkel’s former European ally, Nicolas Sarkozy was happy to pander to anti-austerity when his battle with Hollande crept ever closer. The German chancellor will always remain the poster girl of current EU policy, despite leaders in Britain, Ireland and the Netherlands pursuing a similar approach in their own countries.

After weeks of vacuous rhetoric, Hollande seems to have discovered a policy he can use to embody his vision for Europe. With the support of Greece and Italy, and ECB President Mario Draghi, the French President is proposing the introduction of Euro bonds. These would allow an institution, most likely the European Commission, to borrow on the Euro zone’s behalf, thus lowering borrowing costs and debt repayments in the weaker members, for example by €15bn in Portugal, and turning sovereign debt into payments made by all Euro members collectively.

The current policy of dishing out bailouts in return for austerity packages is understandably unpopular and has caused political gridlock in Greece. It is seen by some as a way to force nations into staying with the single currency and silencing arguments for the alternative. This may be partially true, but at the very least, it enables the stronger European economies to demand structural reform in the southern states and for leaders to put their public finances in order. Euro bonds would effectively remove this incentive and keep the Greek, Italian and Portuguese economies lacking in competitive edge. Euro bonds would do nothing to reduce overall levels of European debt, and would punish the stronger economies. If German borrowing costs rose to an EU average, it would cost them an extra €50bn in repayments each year.

Hollande’s insistence on emphasising growth is in many ways commendable and may be just what Europe needs. There are sound ideas coming out of the pro-growth camp, including the idea of project bonds that would allow Euro members to collectively raise finance for infrastructure projects to help create jobs. What is unfortunate about the movement is the growing hostility towards successful economies like Germany which, at times, verges on plain jealousy.

Merkel is having to deal with a new French President, eager to show his citizens that he is doing the job he promised he would do. She will soon have to face a new government in Athens with the same agenda, with Dutch and Italian elections not too far away. Once these honeymoons have ended, Europe can hopefully return to the job at hand with a clearer vision. The structural problems in Southern Europe, that are also hindering French growth, cannot be swept under the carpet in the hope that Germany will succumb to the idea of collective debt repayments. There may be more ground that Germany could concede if it means saving the Euro zone, but giving into the jealousy bandwagon is certainly not the way to go about it.


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