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Is Germany Getting In Touch With Its Inner Club Med?

Angela Merkel has promised to meet with her new French counterpart François Hollande following his inauguration next week to discuss the EU rescue plans. Yet although this meeting is still a week away, Merkel is already taking steps to prepare for Hollande’s visit. In a break with her previous statements on the matter, Merkel, along with other members of the leading CSU party, are beginning to open up to the possibility of “growth” policies in Europe such as higher inflation and wage growth, according to the New York Times.

During France’s elections, Hollande campaigned on a platform of “growth”, drawing frequent contrasts with Sarkozy’s German-backed policies of austerity. Merkel, as the primary backer of rigid austerity for Europe, had repeatedly insisted that under no circumstances would the stringent requirements of the fiscal pact be changed. The recent change in her language, though mild, suggests that she is aware of the rising tide of anti-austerity sentiment that is spreading not only through France, but through much of Southern Europe. While Germany will likely remain committed to more austere policies than many of its neighbors, it appears that the Germans are now mulling over some ways to reduce the gaps between themselves and their partners. .

Nor is the change in attitude limited to Merkel; it appears that a rollback of austerity is becoming popular in some German economic circles as well:

The recognition seems to be dawning even here that forcing heavily indebted countries to cut spending too quickly and deeply can be counterproductive. “The mood appears to be shifting in Germany,” said Sebastian Dullien, a senior policy fellow at the European Council on Foreign Relations in Berlin. “Even conservative economists are beginning to question whether this austerity is too brutal at the moment.”

Both Hollande and Merkel know that they have to emerge from their first meetings with at least the semblance of a common strategy for Europe. Otherwise, the market turmoil would be catastrophic. It appears that one of the forces driving Germany’s new (if minimal) flexibility is a growing sense that Greece may be on its way out of the eurozone.

To Germans, the Greeks look like completely untrustworthy and incompetent ingrates. More money thrown to Greece is money down a rat hole, most Germans seem to feel. The politicians and the unions will simply steal whatever they get, and then come back in a few months or years with their hands out for yet more.

But with the Greeks out of the equation, the picture looks different. The Italians, Spaniards and the French are, Germans tend to feel, both more competent than the Greeks and more important to Germany. Cutting these countries a little bit of slack is a bit more doable than streaming more euros to a bunch of ‘worthless’ and ‘hopeless’ Greeks.

Germany may be ready for more generosity if the Greeks are leaving the building, but tight limits will remain. Hollande must find a way to square the limited concessions he can get from the Germans with the unrealistic expectations some French voters have. And nothing has changed the German insistence that the euro must be a stable, low inflation currency. It must be a ‘euromark’ rather than a ‘eurofranc’ or, worse, a ‘eurolira’.

It’s not clear that the French can or will accept this; the euro is not out of the woods.

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  • Jim.

    Austerity? What austerity? Didn’t these people see that public spending isn’t actually falling, just (at best) flatlining?

    Returning to a “growth” policy (aka a “growing debt” policy) will not solve any of Europe’s problems. It will just ensure that more serious problems show up at a later date.

    This year, Greece. Next, Italy. (“Growth” policies may postpone that day, but not prevent it.) Then Spain, then Portugal. Then France.

    The only thing Germany can do to help itself is to rearrange its exports and banking sector to face East– past Russia to India and China. Europe’s day is over, the “western standard of living” and Blue Model promises are unachievable, thanks to self-inflicted abandonment of the cultural assets that made them great in centuries past.

    It’s really too bad, and they could turn it around if they wanted to. But they’re too attached to modern Leftist economic and social theories (fads, really) to do so.

  • thibaud

    Some sanity. At last.

  • Kenny

    What is government spending called ‘growth?’

    It only grows government.

  • MarqueG

    The Greek parliament is one small step away from failing to form a government and having to call new elections right now, after three attempts at forming a government have failed.

    As for Germany, I’d be watching FinMin Schaeuble who is a noted budget hawk. And I’d watch the junior partner in the governing coalition, the Free Democrats, who have suffered in state elections for their perceived spinelessness in caving to Merkel/CDU political decisions.

    The next German parliamentary elections do not have to be held for another year-and-a-half or so, but if Merkel allows Hollande too much Keynesian-stimulus leeway, the FDP might decide to bolt the coalition, most likely resulting in new elections.

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