German coalition agreement – Commentators have been poring over the 185-page coalition agreement between the German CDU/CSU and the SPD. Germany is the largest economy in the EU and has played a decisive role in recent years in crafting the policies that have sought, to date unsuccessfully, to resolve the economic and financial crisis. What then can Europe hope for from Germany’s next government, based on the text of the coalition agreement?
(I skip over the “detail” that the Grand Coalition has to be approved in a vote by all SPD members. There will be considerable opposition, but I cannot see the grassroots rebelling against the party leadership.)
Judging only by the sections that explicitly deal with European issues, the short answer is nothing good. Fortunately a number of measures motivated purely by domestic concerns will have favourable knock-on effects on the rest of Europe. Overall, then, the impact ought to be a small positive.
The section on Europe bears the title “Strong Europe” and opens with a section on “Germany’s responsibility for Europe” (all translations are mine). Both headings are highly misleading. The policies envisaged will help ensure that Europe will remain enfeebled and Germany’s “responsibility” for Europe limited. Behind the pious language the nine pages can be summarised as saying that the previous and future Chancellor Merkel and her Finance Minister Schäuble will continue to hold the reigns of German policy on Europe firmly in their hands.
The interpretation of the causes of the crisis focuses on fiscal laxity in some member states and a lack of competitiveness, the solutions on “structural reforms for more competitiveness and strict sustainable fiscal consolidation”. This we know is wrong. I will save myself the trouble of including hundreds of hyperlinks. Symptomatic of the approach in this part of the agreement is that a few costless bones are thrown to the social democrats: the consolidation must be accompanied by “socially balanced investments in growth and employment”, without anywhere setting out clear commitments to or mechanisms for such additional investment. Accordingly there is a section on the social dimension of integration, with a good deal of social democratic language, for example on balancing the market freedoms with fundamental social rights, but little by way of hard content.
There is vague talk of a need for more economic and fiscal policy coordination without any concrete proposals, but also to continued budgetary consolidation (aka austerity) and a commitment to the strengthened stability and growth pact. Germany is prepared to offer loans and “technical support” to help reform-minded politicians regain competitiveness. That is clearly what the crisis countries need: parachute in German experts from the early 2000s labour market reforms whose negative consequences are now being (partially) reversed by the Grand Coalition (see below). Worse, there is a strict denial of the need for any form of debt-pooling, an insistence that European financial support is an ultima ratio, that requires strict conditionality and parliamentary approval (that is, approval by the Bundestag, of course).
More examples could be given, but it would not change the basic picture: tough reforms have to be undertaken in the crisis countries after their ill-advised binge. Some help can be forthcoming from Germany, which itself is blameless and does not have to adjust, but only as a last resort and subject to stringent conditions. European rules have to be toughened up to avoid backsliding in the future. The future in short will be very like the past as far as Germany’s European policy and responsibility is concerned. And we know how successful that policy has been.
Good for Germany Can Be Good For Europe
Thus it is fortunate that, ironically, when the two parties are not actually thinking about Europe, but about domestic issues, they promise policies that will actually benefit the continent as a whole. By far the most important of these commitments is the introduction of a statutory minimum wage of EUR8.50 per hour across the whole country from the start of 2015. There are a number of transitional measures to respect existing collective agreements and those signed in the meantime by “representative” sectoral organisation, but at the latest by 2017 the minimum wage will apply nationwide and to all workers.
Moreover, it will be made easier to declare sectoral collective agreements legally binding on all employers in a sector. This once important mechanism on the German labour market – the Allgemeinverbindlichkeitserklärung, or AVE to its friends – had virtually fallen into disuse. It will tend to underpin wage growth for workers that earn somewhat above the minimum wage. Lastly, the Arbeitnehmer-Entsendegesetz (Posted Workers’ Law) is to be opened up for all branches. This law also provides for minimum sectoral standards to be set, and ensures that they must be adhered to by non-German firms temporarily posting workers to Germany. Until now the main focus has been the construction and care sectors. But unions and employers could potentially now push for core industrial sectors to be covered.
It is hard to overstate the importance of these changes, which mark a strengthening of corporatist institutions after decades in which they have been progressively weakened. In European comparison the proportion of the workforce earning less than 60% of the median wage is highest in Germany, as is the average pay gap of the low-paid. High unemployment in the early and mid-2000s, coupled with labour market reforms, opened up the bottom of the labour market and were largely responsible for the fact that the rise in inequality at the bottom of the distribution in that period was among the most pronounced in the entire OECD. This, in turn, was a crucial element in the most important driver of the euro crisis: the opening up of competitiveness and current account imbalances between the euro core and periphery.
Pay rises, in some cases substantial increases, for around 14% of German workers will make a difference. They will strengthen domestic demand in Germany. But not only that: some of this will leak into higher demand for the exports of goods and services from other EMU countries. The number of German workers directly affected, estimated at somewhat under six million, comfortably exceeds total employment in Portugal, for instance, and is around 2/3 of that in the Netherlands. There will also be knock-on effects for somewhat higher-paid workers. The higher wage costs will be partially passed on in the form of higher prices. This will have the effect of rebalancing competitive positions, and doing so in a less damaging way to overall demand than the strategy to date of one-sided cuts in the periphery. (Note that it is not critical that most minimum wage workers are not employed in Germany’s export sectors. Price competitiveness is a matter of overall labour costs, which include those of the domestic inputs purchased by manufacturing exporters.) Other things equal, this stronger wage and price dynamic will tend to push down the external value of the euro, which again will ease the squeeze on producers in other EMU countries without going through bilateral trade balances. (If overall inflation were close to the ECB target, one could object that the central bank will tighten policy, with negative effects on the other EMU countries, but this is not the case. Indeed with inflation at just 0.7% policymakers should be thankful for every little contribution to reflation.)
There is another effect via the public finances. Currently the German states pay out billions in benefits to low-paid workers. For a substantial number this will not be necessary once workers are earning the minimum wage. Moreover, wage income is “tax-rich”: the upward push at the bottom, with knock-on effects for workers currently earning somewhat above the minimum wage will lead to a substantial increase in income tax, while higher prices will increase the revenues from value-added and consumption taxes. The IAB estimates the short-run fiscal effects at up to EUR3.3 billion a year. This will help to finance a number of substantial spending promises in the coalition agreement. The CDU has pushed through higher spending on for the so-called “mothers’ pensions” (actually for child-raisers), the SPD for those retiring early but with 45 years’ of contributions. And there is a commitment, albeit vague and insufficient, to reverse the trend towards declining public investment in infrastructure, education and other areas. In short, fiscal policy is likely to be somewhat supportive of aggregate demand in Germany, once again with (limited) beneficial effects in other countries.
Even better, both at home and abroad, would have been to tax the German rich and start a large-scale investment offensive, notably by providing more money to cash-strapped local governments. But the SPD (with its 193 to the conservatives’ 311 seats) did not have the necessary force (or, less charitably, it lacked the political vision). Nevertheless, despite its domestic orientation, the impact of the measures agreed for Germany it, on the rest of Europe, is likely to be substantial. At the IMK we will be trying to estimate the size of such effects in the coming weeks. More on this issue when the numbers have been crunched.
German Coalition Agreement – Unintended Consequences
The positive impact of domestic reforms needs to be weighed against the fact that Germany will apparently continue to be an obstacle to reforms in areas such as banking union and establishing a debt redemption fund or more aggressive monetary policies. For now at least, that fight within the country appears to have been lost. Merkel and Schäuble will continue to call the shots, untrammelled by Social Democratic interference. This is largely consistent with the SPD’s record on Europe while in opposition. It will be all the more important, not least in the run-up to the European Parliament elections to mobilise support across the EU for alternatives that emphasise solidarity and investment over narrow nationalistic sentiments and austerity.