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
The contents of this document are indicative and are subject to change without notice. This document is intended for your sole use on the basis that before entering into this, and/or any related transaction, you will ensure that you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc, The Royal Bank of Scotland N.V or an affiliated entity (“RBS”) will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on RBS for investment advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information and disclaims all liability for any use you or your advisers make of the contents of this document. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed. RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding, or acting as market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein.
In the UK RBS is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the US Securities Act of 1933. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC member and subsidiary of The Royal Bank of Scotland Group plc.
The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB.
The Royal Bank of Scotland N.V., incorporated in the Netherlands with limited liability. Registered with the Chamber of Commerce in The Netherlands, No. 33002587.
The Royal Bank of Scotland plc is in certain jurisdictions an authorised agent of The Royal Bank of Scotland N.V. and The RoyalBank of Scotland N.V. is in certain jurisdictions an authorised agent of The Royal Bank of Scotland plc.