German Elections 2017: The Calm Before the Storm?

_ Alan W. Cafruny, Professor of International Affairs on the faculty of Government, Hamilton College. 25 September 2017.

The German federal election brought no major surprises.  According to official exit polls Angela Merkel’s CDU and it’s Bavarian sister CSU won 33% of the total vote.  Alternatives for Germany (AfD) received 13% as the far right entered the Bundestag for the first time since 1949.  The Social Democratic party (SDP) continued it’s descent, capturing just 20% while the Left Party received 9%.   With SPD leader Martin Schulz apparently ruling out entering a new government it is likely that Merkel will form a coalition with the Free Democratic Party (FDP) that returned to the Bundestag on 11% and the Greens, who received 9%.

In most respects the election result presages continuity, especially in foreign and security policy.  The new government, when it is formed, is not likely to diverge from traditional Atlanticism.   However, the result will have enormous significance for Germany and the world because it will determine how the Federal Republic deals with the fading Franco-German alliance and the governance of the Eurozone and wider European economy which it dominates.  Europe has gradually emerged from the financial and economic crisis that began in 2009, but it continues to face grave challenges. Although the southern Eurozone member states have registered positive growth rates and returned to bond markets, they will endure crippling austerity for years to come.  There remain deep flaws in the architecture of the Eurozone and sharp conflicts of interest concerning its reform.  Greece, for example, is staggering under no less than 310 billion euros, 176% of its GDP.

To be sure, notwithstanding the performance of AfD, Germany appears as an island of stability in turbulent European waters.   If she serves out her entire fourth term then the “eternal Chancellor” will surpass Konrad Adenauer and match Helmut Kohl’s 16 years in office. Germany’s relatively tranquil political scene contrasts with many European states where far-right populist parties and movements have established substantially larger bases.  At the same time, Germany maintains a low unemployment rate (3.9) and a (constitutionally mandated) balanced budget. In the first half of 2017 the German economy grew by 0.7%, the fastest pace of the last 3 years.  Indeed, following the July G-20 Summit in Hamburg many observers anointed Angela Merkel as the new leader of the “free world.”

Yet, the thesis of German stability and leadership is misleading.  It overlooks the gathering tensions that are resulting from accelerating uneven development in Europe in the context ofGerman geoeconomic power. The German export mercantilist model casts a large shadow over the continent—and indeed the Federal Republic itself.  The model is incompatible with the development of the European economy as a whole.  It is not sustainable for Germany or the EU.

Not much more than a decade ago Germany was considered the “sick man of Europe,” still recovering from the economic trauma of reunification, experiencing higher than average unemployment and a modest current account deficit. In 2003 Germany (along with France) exceeded the 3% budget deficit limits of the Stability and Growth Pact which it was legally obligated to uphold.  As a result of Agenda 2010, instituted by SPD Chancellor Gerhard Schroeder, labor markets were liberalized, welfare and unemployment benefits were cut, and public spending was reduced.  The resultant wage compression increased the competitiveness of German industrial capital and enabled it to expand its presence in world markets.  The undervalued euro has further enhanced German competitiveness in European and world markets.  The single currency eliminates the option of devaluation for member states running trade deficits, compelling them to submit to “internal devaluation.”

In 2016 Germany achieved record-breaking surpluses in both its trade and current account, the latter reaching $273 billion, 8% of GDP, and exceeding that of China.  With respect to the rest of the EU Germany exports 30% more than it imports.  German industrial capital has preserved its domestic manufacturing capacity not only as a result of the aforementioned policy reforms but also through the establishment of an extensive “German Central European Supply Chain” that produces intermediate goods for the German core from which they are re-exported.  Trade surpluses serve to export deflation, producing debt and unemployment in Europe’s periphery but also the USA.  At the present time, exports account for 46% of Germany’s GDP. If this illustrates the strength of the German model it also indicates, perhaps more ominously, longer term vulnerability in the context of growing resistance to globalization, including within the EU, and also coming technological changes that could transform industries traditionally dominated by Germany, most notably automobiles.

This model has proven beneficial to German industrial capital, but less so for many Germans.  Chancellor Merkel proclaims that “Germans never had it better.”  However, the low unemployment rate has been achieved, in part, through labor reforms that have led to a significant increase in precarious jobs.   Since 1991 income inequality and poverty levels have increased dramatically.  7.1 million Germans hold “mini-jobs” that do not contribute to health insurance; since 2012 an additional 2.1 million workers have relied on government assistance.

French President Emmanuel Macron now plans to present Berlin with a set of detailed reforms for the Eurozone, hoping to influence the composition and program of the new government and compel it to accede to a new Franco-German “grand bargain.” The list of reforms would include an EU budget amounting to “several percentage points” of GDP, a European Monetary Fund,, Eurobonds, and a finance ministry. Since the advent of the euro France has conceded considerable ground to Germany, having lost significant portions of its industrial base, experiencing high unemployment (9.6%), low growth, and excessive debt levels.  In order to gain credibility with Berlin, Macron has proposed sweeping neoliberal reforms.  He has introduced by decree major changes to France’s labor law, the Code du Travail,  that will represent a massive assault on wages and working conditions and are opposed by almost 60% of the population.  Although the French Left and trade unions are divided, throughout September hundreds of thousands have protested what Jean-Luc Melenchon, leader of  the left-wing La France Insoumise (France unbowed), called on the day before the Bundestag elections a “social coup d’etat.”

If Macron’s neoliberal project prevails amid domestic resistance and his own growing unpopularity, it is more likely to increase support for Marine Le Pen’s National Front than to transform the French economy, and certainly not in the absence of broader Eurozone reforms that he has called for.  In fact, at the present time it is doubtful that the new German coalition would be willing or able to embrace anything more than cosmetic changes.   Pre-election discussions among officials in Paris and Berlin have reportedly yielded little progress. Faced with opposition to a “transfer union” across much of the political spectrum, including the AfD, Chancellor Merkel and finance Minister Wolfgang Schauble have little space to give ground on these issues.  Even before the election Merkel suggested only “small contributions” while Schauble called for a European Monetary Fund that would be under intergovernmental authority.  A coalition with the FDP would render substantive reforms—and a resurrected Franco-German “grand bargain”-- even less likely.

Source: http://valdaiclub.com/

Leave a Reply

Your email address will not be published. Required fields are marked *