At
long last, Germany is ready to swear in a new government. After five
months of political wrangling, the Social Democrats (SPD) and the
Christian Democratic Union – together with the CDU’s Bavarian sister
party, the Christian Social Union – have formed a government coalition.
But in the process of reaching that agreement, something has shifted in
German political debate.
Germany has long enjoyed the luxury of
pretending to be something it is not: a small country. At the time of
the election last year, there was hardly any public debate about the
European Union and Germany’s role in it. Chancellor Angela Merkel’s
then-comfortable lead in opinion polls confirmed her instinct that
German voters did not want to be bothered with discussions about
Europe’s future. And, despite being the former president of the European
Parliament, then-SPD leader Martin Schulz also focused almost entirely
on domestic issues.
But the election of US President Donald Trump,
the reform agenda of French President Emmanuel Macron, and, to a lesser
extent, the United Kingdom’s vote to leave the EU, have focused minds
across Germany. If Europe is to meet its many challenges, Germany needs
to question some of its longstanding assumptions. It needs a clear
European agenda, one that dispenses with small-nation thinking.
To be
sure, Germany’s historical narratives and political preferences limit
the options available to any government. But there are still realistic
steps that the incoming German government can take to serve the European
and global good. Will the new coalition be up to the task?
The
Europe chapter in the coalition agreement between CDU/CSU and the SPD
has been framed in Germany as an answer to Macron’s eurozone reform
proposals. But those who were hoping for a fundamental change in
economic policy will likely be disappointed. The new government might
talk about restarting the EU’s Franco-German engine of reform, but it is
unlikely to support proposals for debt mutualisation or the creation of
a sizeable common budget.
But it can and should pursue other
measures. Germany could accept – and even promote – the idea that fiscal
policy should be more counter-cyclical at the national level. It should
also stop dragging its feet on the eurozone banking union and make the
capital markets union a high political priority. It could make a bold
offer on European deposit insurance and a common fiscal backstop for the
Eurozone’s Single Resolution Fund, which steps in when banks collapse
and are wound up. It could tie that offer to a thorough clean-up of the
European banking system, especially in Italy, and to tough rules on
creditor bail-ins.
Germany must also tackle its large savings
surplus, which is unbefitting Europe’s largest economy. To boost
consumption, low-income earners need to be relieved of their excessively
high tax burden. Germany’s labour-market institutions leave many
service workers without much bargaining power or protection, thereby
creating one of the largest low-wage sectors in Europe. German savers
could also do with a low-fee public wealth fund, which could boost
equity investments both in Germany and across borders, while reducing
German demand for international safe assets.
With the finance
ministry in SPD hands, a greater emphasis on public investment, rather
than tax cuts and further reductions in public debt, has also become a
possibility. Germans are beginning to grow tired of the decade-long
ideology-driven pursuit of lower deficits. The country’s constitutional
fiscal rule, known as the debt brake, does allow for higher public
spending. Slight economic overheating as a result of higher private and
public investment would help boost wages and import demand, which might
help reduce Germany’s current-account surplus.
The new German
government should also develop a new trade policy that recognises and is
willing to use the country’s economic clout, and that of the EU, more
strategically. The increasingly protectionist tone of the Trump
administration presents a perfect opportunity for Germany to step into
the breach. The US will soon impose tariffs on all steel and aluminium
imports, and this requires a firm European response.
It is notable
that the German debate about the US-EU Transatlantic Trade and
Investment Partnership was focused primarily on consumer rights and
protecting domestic regulations and standards. But narrow economic goals
such as these, to which a small country would give priority, no longer
suffice for today’s German neo-hegemon. The same is true of overly
optimistic support for a form of trade multilateralism that has largely
run its course.
Instead, the incoming German government needs to
develop a trade policy that supports economic reforms and social
standards, while promoting market economics and the rule of law in its
neighbourhood. Germany could also be doing more to push the rest of
Europe to be more forceful at the World Trade Organisation on social
rights, environmental protection, fair taxation, and improved political
standards.
These proposals require German politicians to shift the
debate. As the eurozone’s dominant country, Germany needs to make sure
that the bloc benefits all of its members and is a stabilising force in
the world economy. Germany must finally start thinking of itself as the
major economic player it is, and behave accordingly – preferably before
new ministers settle into old routines. – Project Syndicate
* Sophia Besch is a research fellow at the Center for European Reform.
German
secretary-general of the Christian Democratic Union (CDU) Annegret
Kramp-Karrenbauer walks past a poster featuring German Chancellor Angela
Merkel after addressing a press conference following a leadership
meeting at the party’s headquarters in Berlin on Monday. The Social
Democrats party (SPD) agreed the day before to join a new coalition with
Chancellor Angela Merkel’s conservatives CDU, heralding an end to the
political stalemate that has plagued Europe’s biggest economy since
September’s inconclusive elections.
German secretary-general of the Christian Democratic Union (CDU) Annegret Kramp-Karrenbauer walks past a poster featuring German Chancellor Angela Merkel after addressing a press conference following a leadership meeting at the party’s headquarters in Berlin on Monday. The Social Democrats party (SPD) agreed the day before to join a new coalition with Chancellor Angela Merkel’s conservatives CDU, heralding an end to the political stalemate that has plagued Europe’s biggest economy since September’s inconclusive elections.