Victorious Hausfrau Merkel & Sleeping Germany in a Fragile EU

Posted in Europe | 23-Sep-13 | Author: Dr Hubertus Hoffmann and Tillmann Dietrich,

Angela Merkel is a lucky lady. This Sunday she landed a glorious win, almost reaching an absolute majority, and got the ticket for another four years as Chancellor of the Federal Republic of Germany, most likely in a coalition wih the Social Democrats (SPD).

Her CDU/CSU party union received 41,5 percent of the votes and gained almost 8 percentage points compared to the last election in 2009. Her coalition partner of the last four years, the liberal FDP, will not be part of the German Bundestag for the first time since the establishment of the Federal Republic of Germany in 1949 with a result of 4,8 percent, just below the 5 percent threshold. The SPD gained slightly to roughly 25,7 percent and the Green Party lost a little finishing at 8,4 percent. The left party, Die Linke, received approximately 8,6 percent of the votes and is the third strongest party for the first time in its history. The Alternative für Deutschland (Alternative for Germany), a new party which wants to split Europe into North and South and introduce a strong Northern Euro, received 4,7 percent and will not feature in the German Bundestag.

Angela Merkel must also smile for two more reasons:

First, the German economy is robust, innovative and should be booming over the years ahead.

Second, the Germans love her hard-hitting approach with no surprises – like them – and favor a middle-of-the-road, pragmatic course.  She is no aggressive, high-profile Franz-Josef Strauss or Helmut Schmidt, but more like hard-working German women in the street who have their households in order and enough money in their pockets. Merkel is a XXL-pragmatic power broker with no strong competition in the CDU and the cabinet. She is not rebellious, and no visionary ­– more a brave ‘Hausfrau of Power.’ Indeed, she is ‘Frau Deutschland,’ a mirror of millions of her fellow citizens who voted her into power again.

But the Merkel-way-of-politics has some downsides and risks as well. There are dark clouds over the sky of Berlin; thunderstorms approaching the capital, mostly from the South of Europe and Paris.

The main task of the next term – the support of reform-absent southern European countries – was, until now, not in cash-outs but guarantees; more on paper than real money. Helmut Schmidt argues that soon, the big pay-out will follow. This will be a shock to come for the sleeping Germans, who save billions at home only to have it sent to the South. If this goes wrong, the Alternative für Deutschland could pop-up like popcorn in the next European and regional elections and the wind change direction.

The main ally and EU partner, France, is losing more and still favors a façade like a Potemkin village, a la Francaise. There, socialism prevails in the heads of the socialist politicians and the unions. With France paralyzed, Europe is as well, and with it goes Berlin.

Glorious Britain is fighting but lost its industrial basis under Margaret Thatcher in the 1980s and needs national healthcare for its economy.

Italy, Spain, Greece and Belgium also have paralyzed political systems which know how to spend money (ideally from the EU), but not how to produce creativity, innovation, good government and a future for their children and students. No tiger states like South Korea or Singapure prevail in Europe, but rather sleeping sheep.

The truth is: Europe needs real, quick and deep reforms – in all member states and the Commission. And a reduction of the deficit. Less state and more free enterprise, and an upsurge of creativity. With an alienated population, this must be done quick, as the toxic burden of pensions, healthcare and deficits cannot be carried over to the next European generation.

But Angela Merkel is still alone with a few Northern member states. She feels insecure in fighting alone due to her personal experience in the GDR dictatorship. Her approach is step-by-step and cautious. She is a good manager of power, but not a strong, forward-pushing leader – like the Iron Lady was. But this is what Europe desperately needs in order to reform, change and flourish. Who will lead Europe into a stable future?

As argued in a speech for the Konrad Adenauer Foundation in Tallinn (Estonia) in February 2013 ( Hubertus Hoffmann,“Strengthening the ‘Soul of Europe’ in Europe 3.0 through Radical Reforms” -read the full text here):

We need active White Revolutionists for a Europe 3.0 – otherwise, we are destined to fail and lose credibility. Europe is now too limp and ossified. This is normal after such a long time and the integration of the South and the East.

A revival of the soul of Europe needs a fresh new approach; a regeneration.

Schuman, de Gaulle and Adenauer were such White Revolutionaries and visionaries in the glorious founding times of modern Europe with their concept of a united Europe – revolutionary after two wars.

Until now, Merkel’s party, the CDU, is more a silent than innovative pool of politicians. More in a stand-by mode than outgoing.  Where are the next dynamic leaders and the CDU visions for Europe? A young, prosperous CDU leader in his early 30s told me about the mood in the party : “We Germans have always faired well doing our business. That is our policy. We want to keep out of the dispute. That is the attitude of most people in Germany and in the CDU.”

Domestic troubles are ahead. While federal tax revenue is growing due to Germany’s resilient economy and strong labor market, the municipalities and cities are facing major fiscal difficulties. The percentage of cash credit debt has risen dramatically, from 29 billion Euro in 2007 – roughly a quarter of the overall communal debt, to 44 billion Euro by the end of 2011 – 34 percent of the total debt. Cash credit only serves to secure financial liquidity and is not reflected in investments or other feasible values, rendering the municipalities increasingly unable to sustain necessary investments in infrastructure or schools.

At the moment, cities and municipalities profit from the extremely low interest rates which, however, incentivize them to spend money that they simply do not have. It is only a matter of time before interest rates will rise significantly and the municipalities will pay a heavy price for excessive debt financing, combined with rising pension burdens, which will eventually fall back upon taxpayers.

Those same taxpayers are already feeling the consequences of the overly-hasty Energiewende (energy transition), which has caused a new dynamic in cost development. The “Erneuerbare-Energien-Gesetz” (renewable energy law) binds all suppliers to gradually increase the renewable share of energy procurement to 35 percent by 2020. Following the abrupt renunciation of nuclear energy, a large portion of energy production – currently 25 percent – lies outside the influence of market forces and is heavily subsidized. However, options to reduce the price pressure are scarce, because the same law guarantees compensation above market prices for 20 years for all existing solar parks, wind farms and biogas plants.

The rising costs weigh heavily on private consumers and small businesses because they, unlike big companies, and especially energy-intensive companies which can apply for exemption from the renewable energy contribution, have to bear ever-rising energy price levels.

Yet, small and family businesses are the backbone of the German economy and it is vital for them to believe in and advocate the energy transition, because they are the engine of German engineering and innovation.

So far, Chancellor Merkel and her coalition have only made announcements and taken the first pragmatic steps. This is true not only for the energy transition but also applies to demographic change, which will burden working people more and more  and create ever more pensioners with fewer people paying into the pension system.

Germany, and especially Merkel’s, image benefit from the reforms of her predecessor, Gerhard Schroeder, such as the essential Hartz labor market reform in 2002. Such reforms are the real reason for Germany’s booming economy, its strong labor market and record tax revenues.

Germany and Europe need a proactive government in Berlin, a government that takes charge and is willing to tackle the essential issues now. This is the main task for Merkel and the new cabinet over the next four years. Aiming for progress involves hard choices and also setbacks, but not tackling vital issues at all is much worse.  

The coming term will be Merkel’s last (there are rumors she will step down two years from now). This gives us hope that the German Chancellor will be more decisive in her actions domestically, and especially in Europe.