German election: don’t mention the euro crisis

The European elections aren’t due until next summer but when Germans go to the polls in a month, their decision will have an impact across the continent.

Not that you'd notice this in a very curious election campaign. Like fellow EU leaders, Chancellor Angela Merkel has spent much of her energy in the last four years grappling with the euro crisis.

The political response has tied European neighbours and their economies together like never before. Yet Dr Merkel has barely mentioned the EU, let alone the euro zone turbulence, in her initial campaigning.

It’s not altogether surprising she is going for a soft focus, given that the unpopular euro crisis has taken place more on German television screens than on city streets.

But her strategy may have been dashed this week by German finance minister Wolfgang Schäuble's admission that Greece will need further financial assistance. It's not an earth-shattering revelation – the IMF and leading economists, including in Germany, have said the same for months – but Merkel allies were very coy on this thorny issue in the run-up to the September 22nd poll.

“I cannot say what sums may eventually be required, I don’t know,” insisted Dr Merkel when pressed on German television on Wednesday.

She has been more anxious to accentuate the positive in this campaign, emphasising things like a recent IMF report that dubbed Germany an “anchor of stability” in the euro zone.

Growth forecasts for this year and next of 0.3 per cent and 1.3 per cent, chiming largely with the Bundesbank, have helped drag the euro zone out of its two-year recession.

Dr Merkel doesn’t mention the IMF forecast’s big fat proviso for Germany: “The outlook for the remainder of 2013 and next year is heavily dependent on a gradual recovery in the rest of the euro area and a sustained reduction in uncertainty.”

Germany’s export-driven economy has always been dependent on the health of its trading partners. Their future, the IMF warned, depends on an end to uncertainty about the appetite for national reform coupled with open-ended timeline for reforms to regulate Europe’s financial sector – the so-called banking union – and other reform of European economic and monetary union (EMU).

The fate of Germany and its neighbours is increasingly inseparable and, according to a survey published this week, German voters are more concerned about the euro crisis than the election campaign, so far, suggests.

One in two Germans (49 per cent) are worried about the economic cost of the crisis. Some 54 per cent are concerned about the cost to social cohesion while a massive 89 per cent think their politicians are not telling them the truth about the crisis.

"It's clear that the euro crisis is perceived by Germans, above all, as a social problem, thus the rise in worry about poverty in old age through continued low-interest monetary policy," said Prof Claudia Mast of the University of Hohenheim, which conducted the research for ING bank.

It remains to be seen if Mr Schäuble’s Greece admission alone will refocus attention in a campaign that has seen a complete dearth of discussion on economic and European issues.

The reason for the lack of interest, apart from Germany’s steady economy, is the lack of any real difference on domestic economic issues. Where a popular idea emerges, the other parties shamelessly steal and repackage them.

The opposition SPD and Greens have seized on the issue of low pay as a potential vote-winner, proposing a statutory minimum wage of €8.50 an hour and a minimum state pension of €850 a month.

That in turn has seen movement from Chancellor Merkel, forcing her CDU to give up decades of opposition to the idea of a pay floor, at least in sectors without pay agreements.

Her coalition partner, the pro-business Free Democrats (FDP), describe statutory minimum wages as a “jobs annihilator”. If they get back into office, however, the FDP will be a far weaker coalition partner and in no position to resist.

The other big economic issue up for discussion is tax: not the long-promised overhaul of Germany’s Byzantine tax code, reportedly the most complex in the world, but some superficial tinkering with income tax rates.

The SPD-Green alliance proposes tax increases for additional spending on areas such as childcare and schools. Both agree on a seven-point tax rate increase for top earners to 49 per cent, while the Greens propose a 1.5 per cent levy on millionaires.

Dr Merkel and her FDP colleagues have dismissed such tax increases as short-sighted, citing below-average salary increases in the last decade.

A final election bandwagon, onto which all major parties have jumped, is rising rents. The euro crisis has seen a noticeable shift of investors – private and institutional – into bricks and mortar in urban areas of Germany, squeezing yields.

That, in turn, has seen owners turn to everything from expensive renovations or evictions to drive up rents and improve their earnings.

German city-dwellers, traditionally renters, have watched the arrival of institutional investors with alarm. Though expert opinion remains divided over whether the big cities are beginning to see a classic property bubble – many sales are with cash rather than bank loans – most political parties have responded with promises of various rent caps.

The construction industry says a more realistic solution would be to boost house building by reintroducing subsidises abolished a decade ago.

None of the parties are willing to tackle the thorny economic issues facing Germany: the spiralling cost of pensions and welfare given in a rapidly greying country, or the cost, to ordinary Germans and heavy industry, of the decision to abandon nuclear energy by 2022.

With Greece the only euro cloud on the horizon, the minds of German voters and their politicians in this campaign are far from Ireland.

But Prof John McHale, economist at NUI Galway and member of the Fiscal Advisory Council, says the German federal election will be a crucial factor in the final months of Ireland's bailout and beyond.

The evolution of German thinking in the crisis has not always been noticed in Ireland, he suggests, citing the shift from an initial hands-off attitude in Berlin towards greater assistance.

Tighter European fiscal rules demanded by the Merkel government were, he points out, the quid pro quo for allowing Europe to step in as the effective lender of last resort.

Continued evolution in thinking is likely when issues parked for the German election – from eurobonds to EU banking oversight – return to the post-election political agenda.

One issue directly affecting Ireland and waiting in the new German government’s in-tray will be Berlin’s backing for a precautionary credit line as the Government attempts an exit from its programme and a return to markets.

German politicians make no bones about their need for Ireland to be a bailout success story but the political appetite for one final gesture to Ireland – for which euro zone unanimity is required – could be tainted by the debate for further assistance or even a debt write-down for Greece.

“If what people always feared about Greece comes to pass – that loans are not going to be paid back in full – there may be less willingness to grant Ireland a precautionary credit line which is, after all, a promise of future funding,” said Prof McHale.

Dublin’s ambitions to scale back budgetary adjustments could strike a dud note politically with a new Berlin administration, he warns, particularly if the clouds are darkening over Athens at the same time.

With a third Merkel term likely, expect no radical shifts in economic or political thinking in Berlin.

There is a some variation among the main ruling and opposition parties on euro stimulus measures, but mostly in details and always coloured by cultural suspicion of Keynsian stimulus measures. The main parties are united, in their election manifestos, in an abhorrence of new debt.

The bailout-criticising Alternative for German (AfD) could be the only wild card in the election arithmetic. Currently polling two cent, the election newcomer is unlikely to clear the five per cent hurdle for parliamentary representation but should be able to shake up the post-election arithmetic.

So far no party has chosen to tackle the AfD head-on, even though its demand for crisis countries to leave the euro zone could have massive consequences for Germany through the euro zone’s interbank payment system, Target2.

A crisis-era spike in Bundesbank liabilities through this system has divided expert opinion across Europe. Many German economists portray liabilities of crisis countries to Germany as a hidden, second bailout.

Others say the Target system is only relevant if a country leaves the euro area – precisely what AfD is demanding.

Last week AfD leader Bernd Lucke told the foreign press he "couldn't name a precise figure" but conceded potential losses to the Bundesbank of a Greek exit could run into hundreds of billions. "The cost of exiting is as difficult to predict for Greece as the cost of staying," he said. "A country leaving would have to meet some (Target2) costs while, yes, Germany would have to shoulder some losses."

Germany’s bailout critics’ demand for crisis countries to exit the euro could be even less popular with German voters than bailouts.