Mathew D. Rose: Good News for Merkel is Not Necessarily Good News for Europe

Dear NC readers: please give a rousing welcome to Mathew Rose, who will be writing original posts here from time to time. Based in Berlin, Mathew is an investigative journalist who focuses on the nexus of politics, finance, and business in Germany, with several acclaimed books under his belt. He’s recognized for his thoroughness and tenacity (for instance, see this profile in Der Spiegel, or the Google Translate rendering). We’re very excited to have him writing here and hope you are as well.

By Mathew D. Rose, a free lance journalist in Berlin

The German word for election, Wahlen, comes from the word “choice”, and in this general election there wasn’t really one. The parties avoided contentious issues, which was not terribly difficult since there were few. With the exception of the leftist “Links” party the other principal parties are solidly centre-right. The newly formed Alternative für Deutschland, whose predominant issue was jettisoning the Euro and returning to the Deutsch Mark, was on this one point the anomaly among its peers.

The clear winners were the Christian Democrats (CDU) and their Bavarian sister party CSU. They registered their best showing in two decades, reaching 41.5% of cast votes and were close to an absolute majority in the Bundestag, the lower house of parliament. This was at the cost of its coalition partner, the Liberals, who for the first time in the history of post-war Germany did not manage the five percent hurdle required for entering the Bundestag.

This was a factor in the biggest surprise of the election: Together with the approximately thirty percent of voters who did not bother to go to the ballot box, another fifteen marked their ballot papers for parties that failed to pass the five percent hurdle. That means that just over half of the voters supported the parties in the next Bundestag. In other words not even one in four of the electorate chose Mrs. Merkel and her party. That might not be sensational for the United States, but it is in post-war Germany. This fact vitiates Mrs. Merkel’s “resounding victory” substantially.

The other surprise was how the issue of the Eurozone’s financial crisis was excluded from the election by the CDU/CDU, Social Democrats, Greens and probably more crucial, the media.

This omission says a lot about the current state of German politics. There is hardly a compassionate voice here in politics, nor in the media concerning the effects of this crisis – at least not in mainstream media. No one talks about the millions of young people, pensioners and so many others in Greece, Ireland, Portugal, Spain, Italy and Cyprus whose lives are being ruined by the current crisis or face emigration.

The Effect of the Election upon European Policy

The German elections will hardly alter Germany’s European policy. The Social Democrats and Greens have supported the policy of Merkel and her finance Minister Wolfgang Schäuble throughout. Most Germans are exceptionally pleased with their government’s handling of the Euro-Crisis as reflected in the voter support of Merkel. For the Germans the current calamity is the product of corrupt and profligate Southern European governments (with Ireland thrown in) and their equally spendthrift populations. That these countries, with the exception of Greece, have been victims of a rapacious and reckless banking sector, in which German banks played a prominent role, is not part of the German discourse.

Interestingly, the term “austerity” is almost unknown in Germany, in place of which budget-discipline (Haushaltsdisziplin) is used. That the populations of the peripheral EU countries are in the midst of an economic downturn comparable to the Great Depression receives little or no solidarity from the Germans, who are more concerned about holiday bargains made possible by the economic downturn in sunny Greece, Italy, Spain, Portugal and Cyprus or purchasing property there on the cheap. The human cost and suffering is seen by Germans as a necessary purgatory to reach the state of financial grace, which Germany has achieved. Nor have the Germans had any qualms about removing democratically elected governments in Greece and Italy, in which it played a decisive roll. In the eyes of the Germans their newly won hegemony over the EU, due to their financial predominance in the EU – Germany is financing a quarter of the Euro rescue – will insure a better Europe.

Germany: Winner in the Euro-Crisis

The Euro-Crisis has been exceptionally generous to Germany. It has reduced the nation’s borrowing costs as a result of record low interest rates on government bonds. The savings are estimated at approximately forty billion Euros (54 Billion Dollars) since the beginning of the crisis. The depressed value of the Euro has also driven Germany’s vital exports and kept it competitive within the EU, which would not have been the case should other countries been able to devalue their independent currencies.

Furthermore, thanks to its political and financial clout, Germany was able to extricate its banks from most risks of the European banking crisis, leaving the peripheral EU nations, who then had to foot the bill, with burgeoning sovereign debts.

The German economy itself quickly recovered from the economic crisis. In 2010 not only did the economy grow robustly, but wages increased for the first time in years and unemployment fell. As tax revenues increased, austerity was never an issue in Germany, as long as the government was not spendthrift and observed “budget-discipline”. To check this possibility the federal and state government deficits were curbed by law in 2011, with the legislation of a debt limit.

However, this recovery has profited only a limited group. Even if the term is not used, austerity has been an integral part of the German economy since the Social-Democrat/Green coalition of 1998. A quarter of German employees work in the low-pay sector – the second highest rate in the EU. Since there is no minimum wage in Germany, almost 1.5 million employees do not earn the equivalent of unemployment benefits. Their wages have to be supplemented by the government. Public sector investment in education and infrastructure has been curtailed for years.

The austerity prescribed for other EU member states, on the other hand, does not seem to be helping them. Behind recent minor positive data often lies a contradictory truth. The decreasing unemployment in nations like Greece, Spain or Ireland has more to do with an exodus of workers seeking jobs in other countries than with improvements in the domestic labour market. Ireland’s return to growth of 0.4% in the second quarter, includes a contraction of 0.4% in the gross national product, once you remove the positive impact of large multinationals and foreign banks.

Germany’s economic policy has not helped Europe. The Germans are obsessed with being what they call “Export World Champion”. For years, as exports and productivity grew in Germany, wages stagnated, giving the Germans a trade advantage over other EU nations. Those EU member states who converted productivity into higher wages to avoid competition imbalances within the EU, such as France, are now being punished. Germany, which for centuries has been so preoccupied with the dialectic, has not given much thought to the consequences when one nation exports prodigiously, neglecting its domestic market.

Germany’s Next Step

Mrs. Merkel and her finance minister Schäuble, can now consider their next move for Europe’s “New Order”. This will probably be the ability to directly intervene in the state finances and economies of other EU nations without the inconvenience of removing governments. That goal could be achieved through a change in the EU constitution, empowering it as overseer. Of course all nations would have an equal say within the political union, but there can be no doubt that EU paymaster and economic powerhouse Germany would be more equal. The German government will of course have to provide some sort of incentive to convince other EU nations to sacrifice their financial sovereignty, but this would probably take the form of money to reduce deficits, instead of consent to Eurobonds, insuring Germany’s firewall against financial responsibility for a “United Europe”.

Such a step would postulate a change in the German constitution as well, demanding a two-thirds majority in the Bundestag. This could only be achieved in conjunction with the Social-Democrats, who also control the upper house of parliament, the Bundesrat.

The Social-Democrats would have no aversion to such a policy as such, but they have a generation problem. The old guard, such as Merkel’s challenger Peer Steinbrück, of whom many became millionaires thanks to the last grand coalition, would like nothing better than a last go at the financial perquisites of government. The succeeding generation of Social-Democratic politicians, which shall be contesting the next general election in four years, remember the consequences of the last grand coalition: a loss of one third of their voters, who did not return in this general election.

Wrangling and bargaining has already commenced, but whatever its outcome, it shall offer little relief to a struggling European Union.

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  1. Hans Suter

    There might be a surprise. CSU chief and Bavaria governor Seehofer who has trown out the liberals, too, but unlike Merkel got the absolute majority a week before national elections is against a black-green Koalition. Hannelore Kraft of the SPD who runs the largest Land, Nordrhein-Westfalen, is against a black-red Koalition. So putting together a new government might take some time. So much so that Linke head Kipping suggests to use the actual left majority (yes, the left has one seat more than CDU/CSU)to push thru a minimal salary law before the new govt is installed.

  2. s spade

    I have nothing but sympathy for the people of Southern Europe who were betrayed by their leaders and gamed by the banks, but how come I never read anything here about the looting by politicians and their cronies in the Southern tier governments of all that low cost money borrowed from the Euro banks?

    Don’t the Germans have a small point, inasmuch as the strength of the Euro derived in large part from German industrial productivity?

    1. Yves Smith Post author

      Um, Spain and Italy are not Greece.

      Italy ran a budget surplus till the crisis. The crisis both lowered tax revenues and raised expenses. Spain’s problem is the result of private sector borrowing, aka a housing bubble:

      Italy has run persistent deficits, but again no one was worried before the crisis, and not even all that much after, because Italy has a high savings rate and virtually all government bonds (until the crisis aftermath widened deficits) were bought by Italians.

    2. craazyboy

      Pre crisis, I looked at OECD data. It showed that Germany’s exports to outside the Eurozone almost exactly offset the trade deficit being run by most of the rest of Eurozone members.

      So that certainly supports euro strength. At least whenever everyone wants to pay the oil import bill.

      But you know how everyone has to get competitive with China, so who knows how long that will last. :)

    3. Maju

      “… all that low cost money borrowed from the Euro banks?”

      Uh? What “low cost money”?, what “Euro banks”? You probably know that the ECB does not loan to states but only (at no cost) to private banksters. This in itself is a total undemocratic act of private appropriation of public resources but guess not the problem you want to discuss.

      So what “low cost money”, what “Euro banks”? I’m perplex at your question. Spanish borrowers owe to local Spanish banks, most often to savings banks which used to be publicly owned and then forcibly privatized by EU dictates, just a few years ago. In many cases these forced privatizations of public resources were absolutely corrup (and in others just mildly corrupt).

      For example the Caja de Ahorros de Navarra (CAN) was robbed from the Navarrese people almost overnight, fusioned with a bunch of weak Spanish savings banks and then joinly re-sold to a Catalan bank at a price well under the real value. Of course some right wing politicians embezzled some good bucks from the robbery of those public assets but the citizens were just outrageously scammed.

      A similar case happened with the infamous Bankia, again a EU-forced privatization-cum-fusion of once buoyant savings banks (of Madrid and Valencia mostly). The right wing politicians, including former IMF Director Rodrigo Rato, got good bucks from the operation but the results, as we all know, were disastrous. Then, instead of letting the bank collapse, as it should, the whole country assumed its debt in a ruinous operation of hateful indebtment.

      Meanwhile citizens can’t still give back their homes in payment for their mortgages but, in a world-wide unique case of debt-slaver, they still get to owe most of their unpaid mortgage to the bloodsuckers.

      Never mind all those elderly small savers who were told that their savings were being put in long-term accounts and, instead, placed in the so-called preferential bonds, which were then unilaterally capitalized (they lost their savings or most of them overnight). I believe that this matter has been discussed by Yves already.

      As citizen-co-owner (and customer) of the BBK (the local savings bank of Biscay) I was also forcibly scammed by having my public bank privatized (as Kutxabank, with the subsequent decline in customer service and social expenditure) but also by absorbing by government decree almost the burden of a deficitary Andalusian savings bank.

      Is this what you wanted to read? Why were we forced to lose our citizen-friendly public saving banks (cajas) in favor of private speculators (some of which may be Spaniards but others surely not)? Why are wannabe-homeowners held in debt-slavery for life? Why this connivence of banskters and political managers? Why one of the first damages of austerity has been investment in science, research and development, solar energy and such?

      Can you answer to all this? I believe that the answer is called “IV Reich” and global distribution of economic roles in a planned manner, planning that results in certain countries not being allowed to manage their economies autonomously but forcibly to become colonies of Germany and other “core” countries.

      1. TC

        Anyone in Spain ever heard of Alexander Hamilton, the first U.S. Treasury Secretary? Surely, there must be a way to capitalize a national bank whose purpose is the issuance of credit (more or less created out of thin air) directed toward investment in targeted areas of Spain’s capital stock whose invigoration would accelerate the nation’s exit from its present crisis.

        I will make a friendly suggestion, too, that you consider its merits without feeling the need to attack me for it. Per your use of the “IV Reich” to describe your feelings toward Germany, I could not question your basis for feeling this way, as I am sure it is considerably justified. Yet better to attack those within Spain who are appeasing this German enterprise you find disdainful. Better to force those Spaniards whom you attack as appeasers to come into your camp promoting a Spanish National Bank financing investment in Spain’s capital stock whose increase brings sight of light at the end of the tunnel.

        Like I said, study up on Hamilton and you’ll figure out what’s best for Spain.

        As for EMU treaty terms such an arrangement might violate, don’t even think about it. Spain’s violation would be the first? HA! These treaties have proven nothing but leaky dikes at best.

        1. Maju

          “Anyone in Spain ever heard of Alexander Hamilton, the first U.S. Treasury Secretary?”

          I presume so, although studying US history is not compulsory (probably not even in the career of History, certainly not in Economics). Anyhow the concept of central banking is much older than that.

          “Per your use of the “IV Reich” to describe your feelings toward Germany”…

          Rather my understanding of the European Union as it is right now. I have nothing against Germans but it’s clear that Germany has the pan by the handle in this mess and instead of acting as European leader is only acting as mere European master (“master” as in slave-owner, not as in teacher). The fault is not exclusively (nor even mostly) German: it is of the lack of genuine European leadership, very especially in Southern Europe, where rather than leaders we “enjoy” comprador caciques who work in favor of foreign interests. Of course there is also some fault in the peoples who have until now tolerated such corrupt and subordinated political elites, but that does not mean that we must pay for their crimes, certainly not with our lives.

          Has anybody even jailed or expropriated Rato? Nope. Why is anybody asking me (who incidentally only want to break free from Spanish oppression) to pay for Rato’s debt when he’s at large and even got a new millionaire job at the Banco Santander? Let him pay his own debts. And, if he can’t pay, let’s exact them in flesh and blood, if you wish. But not my blood, his. I have never managed nor profited in any way from the Bankia mess, why should I pay? No way!

          “… promoting a Spanish National Bank”…

          The Spanish National Bank is right now the European Central Bank. It is the ECB which should play that role. Sadly it does not and that is a most serious problem for all the Union (which I do not understand as mere trade and monetary union but as political confederation, as quasi-federal state – however dramatically lacking in democracy, but Spain does too so…).

          If Germans wish to leave the Eurozone (which they don’t: the AfD only got 4.9% of the vote), let them do so. Germans seem, grosso modo, happy with Merkel’s IV Reich and have rewarded her with almost 50% of the votes this Sunday.

          Personally I do not feel the least attached to Spain, being Basque, but the case is that the debts of those caciques are being discharged on my shoulders and that is simply unfair. Let the banksters and corrupt politicians pay, not the people, never the people!

          If the system must collapse, let it collapse. Nothing good can come from this abusive reverse redistribution towards the financial oligarchies supported by most European political leaders (Spanish and German alike), the ECB and the IMF.

          Recently there were some Spanish (Castilian) left-leaning intellectuals promoting the exit of the eurozone. But the reality is that it is effectively impossible unless the banks and major companies are nationalized first. Also for a large share of people with (forced) Spanish citizenship, that is not even interesting at all. As Basque I feel like Montenegro, which does not have (nor needs) its own currency for being simply too small. Even “socialist” Ecuador, much larger than my little country, has its currency still pegged to the dollar. What we need is real democracy and the ability to intervene in the economy from the political arena, as do some of the Latin Americans: nationalizing companies at will, imposing social clauses on contracts, and so on.

          Even out of the EU, we would still use the euro. Spaniards let them do whatever they can: the artificial realm is in its worst shape in all history and will probably go the way of Yugoslavia as soon as the EU collapses.

          I feel no need to reinforce nor have any hope for Spain as state but I won’t accept that the cost of corruption and “happy credit”, promoted and facilitated from Brussels and the financial centers in Frankfurt, Paris, London and Wall Street, is unloaded on my shoulders.

  3. Ignacio

    Thanks Mr. Rose for this post. I generally agree with the analysis and, in fact, much of what you wrote matches many of my thoughts about the german elections and the socioeconomical situation in Europe. As expected, German elections were no news for those of us waiting for a policy change in Germany and the european union (notice that I avoid the use of upper case when writing european union). Many germans may feel satisfied with current policies and may believe that a dream of an economy based on ever increasing net exports and consumer repression is sustainable but my guess is that, in less than 10 years, this dream -like the dream that fed the housing boom in Ireland or Spain- will be broken in the form of higher unemployment in Germany and it will be painful. Such dreams always find illusory claims of a New Order but the plain truth is that this New Order is not sustainable, both economically and socially. I also predict that though peryphery countries are suffering the most during this crisis, the turning point will be reached when other countries like France, the US or BRICS, fed up with german policies directed to win competitive advantages through consumer repression, start to implement a response.

    Thanks a lot. I will be waiting for more illimunating posts like this.

  4. John Jones

    “There is hardly a compassionate voice here in politics, nor in the media concerning the effects of this crisis – at least not in mainstream media. No one talks about the millions of young people, pensioners and so many others in Greece, Ireland, Portugal, Spain, Italy and Cyprus whose lives are being ruined by the current crisis or face emigration.”

    I’am curious. If there was a compassionate voice in the German media or German mainstream media if it would have any effect on the the way the average German views the crises or the people particulary in Greece?

  5. Heinz Roggenkemper

    Very sloppy article…
    Some basic arithmetic: the CDU/CSU share 41.5% and a turnout of 71.5% means that 29.7% – quite a bit more than 1 out of 4 (in contrast to his first bolded statement).
    The most salient fact now that Merkel is in search for a coalition partner is the following:
    – After her first coalition (with SPD) ended in 2009, the SPD recorded their worst result ever.
    – After her second coalition (with FDP) ended in 2013, the FDP was kicked out of parliament (for the first time after WW II).
    It will not be easy at all for Merkel.

    Mathew Rose has to do a lot better than this.

    1. charles sereno

      Sloppy arithmetic…
      Mr. Rose is clear when he states “not even one in four of the electorate,” that he considers eligible voters who didn’t bother to vote as part of the electorate. Recalculate.

    1. Irishmist

      “That these countries, with the exception of Greece, have been victims of a rapacious and reckless banking sector, in which German banks played a prominent role, is not part of the German discourse”…
      EXCELLENT POINT – German & GB Banks lent to Irish banks who lent to developers… all earning good interest rates… but the Irish Government had to bail out the Irish banks to pay the German and GB banks….
      YES – the Irish taxpayer bailed out German banks.
      The bloody Germans now have what they could not achieve in war… control of Europe.

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