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A Jamaican coalition for Germany?

Report of September 25, 2009

German voters will vote on 27 September in the midst of a crisis that has turned Germany’s economic strength – its status as the world’s export champion – into a disadvantage. An unprecedented collapse in exports is currently expected to lower gross domestic product by about 5% in 2009, raising concerns that mass unemployment may return.

In response to the challenge, the government has introduced a number of rescue packages for Germany’s banks and economy. Those measures, and other effects of the crisis, are expected to raise the total public debt by one-third by the end of 2010 – to above 80% of gross national product.

Debt this high is alarming, and the state of public finances, already poor, is now Germany’s central economic problem – more so than the timebombs associated with the words demography, climate, energy and labour-market reforms. Unless the public debt is managed, it may prove impossible to defuse or contain the effects of these time-bombs.

As a result, the new parliament and government that Germans will vote for this Sunday will probably face an even greater challenge than the current one.

Remarkably, though, the economy has played barely any role in the election campaign. No party is providing the electorate with a clear insight into how they would deal with the public finances. Conservatives and liberals are suggesting tax cuts, social democrats are offering long-term visions of full employment and a green recovery, and the left is promising wealth for everyone.

Voters seem to be forgiving politicians’ decision to ignore economic reality. A sense of consumer optimism – almost as if Germany were experiencing another Wirtschaftswunder (economic miracle) – may be one factor. Largely unexpected and rarely understood though it may be, this optimism does have a real economic basis.

The crisis has not hit households. With zero inflation, rising wages and low unemployment, their disposable income has remained stable. The burden of the crisis is falling primarily on rich individuals and export-oriented industries, but they are not laying off workers, many of whom are highly qualified, because they expect a timely recovery and because the government is willing to subsidise temporarily shorter working hours. Moreover, few of the rescue measures have yet to come into effect.

It is therefore no miracle that fewer than 3.5 million people are unemployed at this point. The figure may have been 3m at the end of last year, but it is still far lower than the 5m before recent labour-market reforms. On top of that, Germany emerged from recession – defined as at least two quarters of contraction – in the second quarter of 2009. These are sound reasons why economic issues are not playing a decisive role for German voters.

Germany may be leading Europe out of the recession, but if it is to provide Europe with economic leadership after that, the new government will need to restructure public finances, by reducing government expenditure (including rescue packages that may prove unnecessary) and by swiftly raising taxes.

Another ‘grand coalition’ formed by the Christian Democrats (CDU/CSU) and the Social Democrats (SDP) could be best suited for that challenge. However, that would be ruinous for the SDP since its members would have problems supporting a continued austerity policy. Conservatives and liberals, if in government, would probably have only a small majority, one that could easily be blocked by the left wing of the conservatives from Bavaria and North-Rhine Westphalia or by the left’s possible majority in the Bundesrat, the second chamber. They would then not be able to reduce expenditure and would need to break their promise to decrease taxes.

The best solution for the country – and therefore also for Europe – might therefore be a ‘Jamaican coalition’ of conservatives, liberals and greens, a term applied because the parties’ colours match those of the Jamaican flag. The compromise in this case could be fiscal stability, green recovery, climate change moderation and economic reforms. This would come, however, at the price of more political complexity.

Published in European Voice, September 24, 2009
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