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Analysis
Stop the world – Germany wants to get off

Stop the world – Germany wants to get off

Provincial coalition talks contrast with European challenges 

by David Marsh

Mon 28 Oct 2013

A hit musical from the 1960s that made waves in London’s West End and New York's Broadway – ‘Stop the World, I Want to Get Off’ – could be the theme song for the putative coalition partners in wrangling over forming the next German government.

The most important country in Europe seemingly wishes to bring international affairs to a halt while the two main political parties discuss hiking old age pensions, renewing ageing bridges and controlling the prices of municipal swimming pools. And – oh yes – complaining about that otherwise nice young President Obama for having his secret agents listen in to Chancellor Angela Merkel’s telephone calls.

Merkel’s Christian Democrats (CDU) and the hitherto opposition Social Democrats (SPD) seem ready to negotiate through to Christmas, possibly beyond, over a mix of social benefits and other spending increases, coupled with small-scale tax hikes, to lower German wage and income inequality. All very good for the many Germans who feel they have lost out during the country's export boom in which the country has amassed net foreign assets of €1.1tn (the Bundesbank's figure for March 2013), a significant part of which will never be repaid.

The lengthy coalition talks are the product of the bizarre outcome of the 22 September election. The CDU won by a wide margin – yet lost its liberal FDP coalition partner. Merkel’s conservatives are therefore condemned to negotiate with one or both of the left-wing parties which comprehensively lost the vote. They expected to stay in opposition and therefore have little to lose from embarrassingly protracted political horse-trading on largely provincial issues.

The CDU and SPD appear blithely unaware of the large-scale European decisions that, in the meantime, cannot be resolved because of indecisiveness in Berlin. The ball is in Germany’s court for two reasons.

First, it is well-nigh inevitable that Greece and Portugal, the two most exposed countries in economic and monetary union (EMU), with government debt to GDP projected by the Organisation for Economic Cooperation and Development (OECD) at 181% and 132% of GDP respectively next year, will need a formal debt write-down in 2014 – where Germany will foot the largest slice of the bill. Stretching out debt payments and lowering interest rates on existing loans will impact above all officially-sponsored loans from European creditor countries to the indebted southern nations – whether in the form of funding from central banks (including the European Central Bank, various European bailout funds, export credit agencies or other public sector financial bodies such as Germany’s KfW.)

There will be a furious row between the ECB and European creditor governments because the ECB wishes to be treated (like the International Monetary Fund) as a preferred creditor in such exercises – whereas European politicians such as Wolfgang Schäuble (still German finance minister pending a new government) wants the ECB to foot the bill.

Second, Germany, as the largest creditor, will (in one form or another) have to put up additional funds to finance possible resolution packages for troubled banks that will be identified as requiring extra capital under the European Central Bank’s comprehensive review of bank liquidity and solvency due to be completed by November 2014.

As Mario Draghi, the ECB president, has made clear, some banks will have to be labelled as failing, to buttress the ECB exercise and shore up general credibility in European banks. Governments will have to bring in the appropriate ‘national backstops’ (in addition to funding from shareholders and creditors) in case of need. Draghi’s statement is seen as a deliberate attempt to remind the German government of its responsibilities – especially as it is widely believed that German (rather than Spanish or Italian) banks will be singled out in ECB health checks as among the most capital-stretched European institutions.

Wolfgang Clement, the former industry minister under Chancellor Gerhard Schröder, who is on the SPD’s more market-orientated wing, has said that the Grand Coalition now in prospect will drive forward regulation and state control and build up social handouts and subsidies.

While all this is going on, international capital market pressures and IMF demands for 'debt sustainability' for indebted euro nations could present the future German government with a prospective bill for several billion euros in lost income in future years from Greece and Portuguese debt write-downs. Not a happy prospect for the New Year.

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