By Viktoria Palushaj
On September 22, Germans will head to the polls to participate in what has become the most important governmental election across the Eurozone since the start of the debt crisis. Up for grabs are 598 seats in the Bundestag, the lower house and main legislative body of Germany’s federal parliament. While electorates cannot directly choose the head of government, majority voting among selected members of the Bundestag will determine whether or not Angela Merkel will continue her reign as chancellor. For anyone who has not followed the Eurozone’s economic struggles over the past four years, it would be an understatement to say that the outcome of the upcoming German election has considerable implications for the austerity-versus-stimulus debate in the monetary union.
Back in 1998, when current members of the Eurozone applied to adopt the Euro as its shared currency, one of the key stipulations was that they be “fiscally responsible.” That is, a nation’s public debt could not exceed 60 percent of its gross domestic product. This rule, most critical to the stability of the currency bloc, was repeatedly ignored and violated soon after it was met. Lacking the proper regulatory oversight to ensure that governments practiced fiscal restraint, countries like Greece, Ireland, and Portugal went on massive spending sprees that would later make it impossible for them to repay their creditors without bailout assistance.
As the largest and healthiest economy in Europe whose success was largely attributable to and dependent on being a part of the monetary union, Germany owed its fellow members to step in with financial support thus calming market fears of a potential currency collapse – much to the reluctance of German taxpayers who would end up footing the bill. Bailout assistance did not come free for recipient countries though. Germany, in collaboration with the European Commission, European Central Bank, and International Monetary Fund, mandated that all bailout beneficiaries surrender some of their democratic and economic autonomy in return for financial aid. This essentially meant embracing German values of prudence and fiscal discipline by way of growth-crushing austerity.
Resultantly, the Eurozone is now in its longest ever recession and joblessness is at a record-high. The German-imposed spending cuts and tax hikes are not doing what Chancellor Merkel had hoped they would in improving debt sustainability. Without real economic growth, creditors are less certain that struggling economies can honor their outstanding liabilities. Similarly, discouraged European workers have grown disgruntled with their economic circumstance, staging violent protests against their respective governments for complying with such harsh terms. As anti-German sentiment intensifies and the country ironically turns into somewhat of a scapegoat for the region’s troubles, Merkel has been pushed on the defensive.
In response to claims that austerity has proven painfully ineffective, Merkel recently said that she sees “no contradiction between growth policies and sound fiscal policy.” According to her, possibly misguided German strategy is not the reason why growth has become evasive in the region. Instead, she believes that missing structural reforms, which fall under the responsibility of individual governments, have denied economic expansion. The truth lies somewhere in the middle. The structural inefficiencies she alludes to are problematic, but it will take years for them to be resolved. More importantly, austerity is acting as a much larger deterrent to the region’s economy and investor confidence than she is willing to admit.
Campaigning on policies marginally different to Merkel, Peer Steinbruck has emerged as the main challenger to unseat the Chancellor. In an attempt to lessen moral hazard created in part by Germany’s willingness to provide rescue money in years past, Steinbruck proposes that he would only allow taxpayer funding to be used towards government aid and that banks would have to finance their own bailouts. He agrees in principal with Merkel regarding austerity, but indicates that he would relax the pace of current measures to prevent further downward pressure on the regional economy as well as its impact on Germany. Unfortunately, easing the pace of austerity will not be enough to return the Eurozone economy back to positive growth, and both candidates are still a long way from this realization.
With less than eight weeks to go until the election, early polling data indicates that Angela Merkel is still favored to win her third term as chancellor. If she does in fact succeed in her re-election bid, it will be very hard for her to continue advocating for austerity treatment when the Eurozone economy slides deeper into recession. She is also facing political challenges from other influential leaders, such as France’s Francois Hollande whose economic ideologies stand in stark, fundamental contrast to German tradition, which may force her to compromise for more growth-oriented policies. Steinbruck would be easier to persuade given that he has already acknowledged austerity’s harm. But, either way, the only way for investors to restore trust in the region and for economic activity to rebound is if Germany abandons its obsession with constrictive fiscal policy.
(Viktoria Palushaj is an economist and Market Analyst with CitrinGroup, an investment advisory firm in Birmingham. Contact her at (248) 569-1100 or visit www.citringroup.com.)
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