Monday, December 16, 2013

What Germany's new coalition government means for the EU

Almost three months after the general election in September, Germany finally has a new government. In a grassroots referendum, members of Germany’s Social Democrats (SPD) voted to accept a coalition agreement that party leaders had drawn up with Angela Merkel’s Christian Democrats (CDU) and its smaller, more conservative sister party, the Christian Social Union (CSU). The new government is unlikely to change EU policy a great deal.

In German, the coalition agreement is called Koalitionsvertrag, or coalition treaty. Germans like treaties and other rules that bind. But Germans also know that coalition agreements do not necessarily bind the politicians that sign them. Few of the big decisions that have shaped German politics in recent years were included in coalition agreements; for example the decisions to send troops into foreign wars, abolish conscription or shut down all nuclear power stations were not. The last coalition agreement of 2009 said nothing about the euro crisis.

Therefore, the new coalition treaty should be taken for what it is: a declaration of intent and a snapshot of what the three parties involved are thinking at the moment. Even bearing this in mind, the European policy chapter of the new agreement will inspire few people. The three parties make a strong commitment to the EU (“European integration remains our most important task”) and to the euro (“Germany stands by the single currency”). But like the rest of the text, the Europe chapter often papers over conflicts by simply adding up positions: we want fiscal consolidation; and growth. We want a stronger Europe; and subsidiarity. We want more solidarity; as long as countries take responsibility for their own problems. And so on.

There are few concrete proposals for reforming the EU. Beyond a vague promise to “adjust the treaty provisions on economic and monetary union” (perhaps to allow for banking union, stronger fiscal oversight or reform contracts), there is no mention of a major treaty change, nor of a move towards fiscal or political union.

The agreement reconfirms the ‘community method’ as being central to EU decision-making (the community method involves the European Commission, Parliament and Council of Ministers in EU law-making) – despite the fact that Merkel has on several occasions expressed a preference for inter-governmental decision-making. Unless the euro crisis flares up again, European governance is likely to revert from crisis mode (late-night phone calls between big country leaders and dramatic Eurogroup summits) to the established interaction between Commission, Parliament and Council. However, other than stronger fiscal oversight, the Commission is unlikely to gain much additional authority as long as Merkel stays in power.

Guido Westerwelle, the FDP foreign minister, has been replaced by Frank-Walter Steinmeier, who held that job during the last grand coalition. Steinmeier is less of a true believer in European integration than Westerwelle. Nevertheless he will be one of the strong figures in the government and the weight of the foreign ministry – traditionally, sympathetic to the EU – in decision-making may grow.

The agreement advises Brussels to “focus on the big issues of the future” instead of meddling in policy areas that are better left to the member-states or their regions. It also calls for a measurable reduction of EU regulation in selected areas, specifically those that affect small and medium-sized businesses. The new German government also wants to see a “more streamlined and efficient college of commissioners, with clearer responsibilities for individual commissioners”. This implies that the German government is open to the idea of dividing the college into junior and senior Commissioners (as proposed in a recent CER report).

The coalition agreement seems to confirm a gradual disillusionment of the German political class with the European Parliament. Traditionally, Germany has been one of the strongest backers of the EU’s legislature. However, the coalition deal states that for the democratic legitimacy of the EU, the involvement of national parliaments in EU business is “equally important as” a strong European Parliament. This will please people in Britain, the Netherlands, Denmark and other countries that want to see a stronger role for national legislatures in the EU. But it will surprise and infuriate many MEPs.

Relations between Berlin and the Parliament may be rocky in the coming years, partly because Merkel does not like its idea that the party with the most seats after the European elections should see its designated candidate automatically become Commission president (see the recent CER essay by Heather Grabbe and Stefan Lehne). The coalition agreement does not deal with this topic, but instead calls for an EU-wide electoral system with a minimum threshold to keep fringe parties out of the European Parliament.

When it comes to handling the euro crisis, the coalition treaty reconfirms the traditional German line that the main responsibility for dealing with it lies with the euro countries that got into trouble. “The public debt ratios in the euro countries need to be reduced further”, states the agreement. And it calls for the EU to strengthen its oversight and control over national budgets.

But the coalition parties also acknowledge that fiscal overspending was not the only reason for the crisis. The debate in Germany has in any case moved on from stereotyping work-shy Southern Europeans. But it is noteworthy that the coalition text explicitly lists fundamental flaws in the construction of the euro, mentioning financial market distortions and macro-economic imbalances among the causes of the crisis. It is equally noteworthy that the agreement does not offer new solutions to these problems.

The agreement states that economic imbalances in the eurozone need to be addressed through the efforts of “all euro member-states”. But those who had hoped that the inclusion of the Social Democrats in the government would result in Germany spending much more, and thus helping to rebalance the eurozone economy, are likely to be disappointed. Sebastian Dullien from ECFR has calculated that the extra spending promised for infrastructure, education, municipalities and pensions amounts to 0.1 per cent of German GDP for each year that the new government can expect to be in power. Most of the additional spending will go on consumption. A new national minimum wage and the first strengthening of trade union rights in decades could push wages up, which might lower Germany’s large current-account surplus. What Germany particularly needs for sustained growth, however, is more investment. On growth-boosting structural reforms in Germany, the coalition agreement says little.

The agreement demands that the EU must finally break the “interdependence between private bank debt and public debt”. It does not promise faster or more wide-ranging steps towards a banking union than had hitherto been proposed by Angela Merkel and Wolfgang Schäuble, her finance minister (who will stay in post). The new government insists that shareholders and creditors must be first in line when a bank gets into trouble, and that a new eurozone resolution fund should be paid for by the banks themselves, not taxpayers. Until the new fund has collected enough money, the European Stability Mechanism, the eurozone’s bail-out fund, may be used for bank recapitalisations, but only as a last resort (if bail-ins and national bail-outs are exhausted) and only up to a limit of €60 billion. As expected, Germany does not want its local savings banks included in the banking union, and it still rejects joint European deposit insurance.

Looking beyond the crisis, the coalition agreement puts a lot of emphasis on the need for structural reforms in the eurozone, to increase economic growth rates in a sustainable way. The idea of “reform contracts” between individual euro countries and the “European level” is taken up again. However, there is no explicit commitment to a new eurozone budget to motivate countries that struggle with tough reforms. Instead, the coalition agreement calls for a better use of EU Structural Funds and the European Investment Bank to underpin structural change and modernisation.

The SPD’s influence is visible in a lengthy section about the need to strengthen the “social dimension” of the EU. However, the only tangible measures in this respect are German help for neighbouring countries that want to improve their apprenticeship systems (this started under the last Merkel government) and the drawing-up of an EU social “scoreboard”. This scoreboard (a Commission idea) would be an attempt to feed warning signs of high employment and social pain into the EU’s strengthened fiscal and economic surveillance.

It should not come as a surprise that the coalition agreement largely perpetuates Germany’s euro policies of the last four years. First, when it comes to euro crisis management, Germany has effectively had a grand coalition since 2010. In her last government (a coalition with the liberal FDP), Angela Merkel was faced with a small but persistent anti-bailout rebellion within her own ranks. Therefore, she had to rely on the SPD to pass almost all big euro-related measures in parliament. Therefore, Germany’s euro crisis management was already to some extent a compromise between the CDU/CSU and the SPD.

Second, existing and pending rulings by the powerful constitutional court put clear limits on what any German government can do. The court has ruled that no German government is allowed to create unlimited liabilities for the German taxpayer. The coalition agreement’s reiteration that the new government will not support eurozone debt mutualisation is therefore not surprising.

Third, German voters overwhelmingly support the cautious course that Merkel has charted in the crisis so far. For the SPD to demand a radical departure would have been politically risky – and hard to sell now that most Germans think the worst of the crisis is behind them.

Finally, the past four years have taught German politicians that it would be foolish to lay down either ambitious goals or rigid red lines at a time of crisis. As long as the eurozone looks shaky, German politicians will want to have a large degree of flexibility to react to developments. For some, the fact that the coalition programme is rather vague on EU policy will be disappointing. But this vagueness will allow the new German government to react flexibly if there is renewed instability in the eurozone.

Katinka Barysch is director of political relations at Allianz SE. The views expressed here are her own.

No comments: