German vote won’t end euro crisis
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German vote won’t end euro crisis

Germany’s rejection of parties opposed to closer eurozone integration is a win for Europe. But the optimists must not get carried away, says Peter Bofinger, a long-time adviser to the German Government.

Disquiet among Germans over the country’s financial support for weaker eurozone members has been growing, but Bofinger said the re-election of Angela Merkel showed clear public backing for her efforts to solve the eurozone crisis.

Pro-European parties enjoyed a net 8.1 per cent gain in their share of the vote, marked by the re-emergence of the Social Democrats (SPD). The new balance of power opens the likelihood of a gentler German attitude towards the pace of austerity and the need for reform in the rest of the euro area, he said.

Yet while the SPD is likely to smooth some of the sharp edges, Bofinger warned the new government was likely to remain opposed to some of the bold solutions that could end five years of crisis.

“Making taxpayers stump up for bank failures or liabilities in other countries is something that no German government would be willing to accept for the time being,” said Bofinger, who is also a Professor at the University of Würtzburg.

“The problem is then of course: who will come up with the money? No one really knows how big this black hole is, whether it can be managed by the national governments.

A crisis in Italy could test Germany’s will he said. “There are lots of risks in the next months and years. The most serious is Italy.”

Further recession there could erode market support to such an extent that it becomes unable to finance its EUR2 trillion of debt

“It might be there are only two options: that the ECB finances Italy without conditionality and therefore loses credibility, or European governments go down the path of debt mutualisation,” he told RBS clients shortly after Merkel’s historic third election as chancellor.

“In this scenario it is good to have this grand coalition. Debt mutualisation is an idea Germans really dislike so they would need strong political backing.”

In general, the new balance of power in German politics is a plus for the euro and Europe’s financial markets.

The liberal Free Democrats (FDP) – Merkel’s old coalition partners – humiliatingly failed to win the 5 per cent of the vote needed to sit in parliament.

The free market FDP had been highly critical of efforts towards further European integration and, in Bofinger’s view, were a destabilising force by backing ideas like a Greek eurozone exit. “They had been more of a problem than a solution in crisis management,” he said.

Just as importantly, Alternative for Germany (AfD) – a new anti-euro, anti-bailout party – also fell short of the 5 per cent threshold: “This party could have been a real obstacle for German crisis management. Without representation their influence will diminish. This is really a very, very good result.”

By contrast, the SPD have been the most open of any major German party to closer political integration with European peers, he said. They backed a 2011 proposal from Bofinger’s advisory group – the German Council of Economic Experts – towards a scheme amounting to the mutualisation of large chunks of European sovereign debt and have favoured a more gradual approach to fiscal tightening.

Despite the differences, Bofinger said he believed there was still plenty of ground for a repeat of the relatively successful grand coalition between Merkel and SPD leader Peer Steinbruck between 2005 and 2009.

Merkel moved towards a number of SPD positions like a minimum wage and rent controls during the run up to the election said Bofinger. Even an SPD plan to raise top rate income tax to 50 per cent is something he thought Merkel could well accept.

“I don’t think the ideological divisions between Mrs Merkel and the SPD are that huge.”

Prof Dr Bofinger is a member of the German Council of Economic Experts – a group of five independent economists who advise the German government and parliament on economic policy issues. An advocate of Keynesian economics, Prof. Bofinger is a research fellow at the Centre for Economic Policy Research in London and Professor for Monetary Policy and International Economics at the University of Würtzburg.


The statements and opinions expressed in this article are solely the views of Peter Bofinger speaking in a conference call with RBS clients on September 23 2013 and do not necessarily represent the views of the Royal Bank of Scotland

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