Germany: Austerity actually works

Journalist at Süddeutsche Zeitung Catherine Hoffmann considers that despite the scepticism in the Southern countries, the data show an improvement in the area.

“Unemployment is decreasing in Spain, economy is growing in Portugal and the bailout is old news in Ireland. In all those countries, citizens have stopped living beyond their means; they have compensated the unbalances in the foreign trade balance and between income and expenditure, and their current account balance are even positive (except for Cyprus). Besides, they have reduced the labour costs (-7.7% in Spain) thus regaining the financial markets’ trust. However, reforms take their time. It took 10 years until Germany’s 2010 Agenda took effect.”

Germany will not truly accept softening the Stability and Growth Pact, as the Italian PM Matteo Renzi demands. Ms Merkel and the new President of the European People’s Party, German Manfred Weber, insist that the public finance must be under control, and they don’t accept attacks from Rome and Paris against their stability proposal.

Even though Europe allowed Germany to violate the Stability Pact limits in 2003, Berlin will not give in so as to loosen the application of the fiscal rules. The spectre of the extreme right (e.g. Le Pen in France) will not persuade Germany, nor the 26 million unemployed and the anaemic growth.

The German vice-chancellor, social democrat Sigmar Gabriel, said after meeting François Hollance and Matteo Renzi:

“Nobody wants to touch the Stability Pact. What is necessary is to redefine it in a creative way.”

It isn’t clear whether Mr Gabriel is able to defend the revision of the austerity in Germany –nobody is in the mood for that around here.

The reason is that Germany says nein to itself. It doesn’t allow itself any condescence. The Bundestag has just adopted by a wide majority the national minimum wage of 8.5€/hour. Many experts and entrepreneurs warn that the minimum wage could lead to a larger unemployment rate.

President of the trade association Ingo Kramer describes the measure as “threatening;” Angela Merkel refers to it as “painful compromise,” and even Caritas’ President Peter Neher fears that it may lead to an increase in unregistered economy.

Even Bundesbank’s President Weidmann said that the minimum wage threatens the creation of employment.

“There is the risk that companies may create less jobs. Besides, the main risk is for those people with little qualifications, who will have even less job opportunities in the future.”

Analysts at the economic daily Handelsblatt consider that Germany now goes well because it is still benefiting from the structural reforms adopted in the past. Minister of Finances Wolfgang Schäuble is the third one in 15 years trying to overhaul the public budgets.

According to journalist Markus Grabitz,

“the current Government is suffering from the structural reforms carried out almost ten years ago, such as retirement at 67 years old, changes in the fiscal and labour market policies, social cuts and unemployment benefits cuts.”

However, the consequence of the 2010 Agenda have been the labour market duality (i.e. poor workers versus rich workers) and a bigger social inequality. After all, the strength of the German economy is not based on those reforms but on its industry and on the consensus among all the agents of the business world.

Nonetheless, most economic media are criticizing Angela Merkel because she hasn’t done anything to lay the foundations for a long-term economic growth. Many experts demand that the second half of Ms Merkel’s legislature go in exactly the opposite direction, that is, the she should impose greater austerity at home.

Mr Weidmann doesn’t like Mario Draghi’s generosity; he thinks nothing good can come from flooding the markets with more money. He is also suspicious about the systemic purchase and the American quantitative easing, which Mr Draghi might copy from the US Federal Reserve. The ECB President said that he was willing to buy Asset Backed Securities so as to alleviate the burden on banks, which would thus have more scope for granting new credits.

“The ECB has reached the limit of its possibilities with the monetary policy,” chief at Macroeconomics and Economic Research Institute IMK Gustav Horn says. He believes that the problem is the economic insecurity.

For chief economist at Commerzbank Jörg Krärmer, the new TLTRO will boost the financial markets but won’t help the economic situation.

Then, what will definitively boost the economic conjunction? IMF chief Christine Lagarde is in favour of the Southern countries’ petition of a greater flexibility; she fears that such rigidity damages the fragile economic growth.

For his part, Eurogroup chief Jeroen Dijsselbloem wants to give more time to those countries that are successfully applying the structural reforms. Thus, these countries will be able to get out of their precarious position.

In this context, Ms Merkel faces a serious image problem in Europe in her ninth year as chancellor. Despite her great power, she had had to give in to the pressure exercised by the social democrats, with whom she runs the country. The question is whether she will also yield to the left wing demands so as to smooth the youth unemployment in Europe. That is, if they do not touch the Stability Pact.

*Cartoon by Martyn Turner, a British cartoonist and writer based in Ireland.