The SPD, in the shape of its President Franz M?ntefering, has opened the door – not to swarms of locusts, or hedge fund executives but to the CDU, and its leader Angela Merkel. M?ntefering said at the weekend he would back a grand coalition with the opposition CDU should the German chancellor Gerhard Schr?der lose next month’s general election. Of course, the consensus opinion is that this would just about kill the reform process stone dead. Morgan Stanley’s Elga Bartsch has a reasoned explanation for this view here (NB, you see I don’t only malign her. Hint: try Googling for “Elga Bartsch”).
A Fistful Of Euros
European Opinion
Of course, if the coalition isn’t anything of the sort, but an opportunistic division of the electoral spoils, it’ll be a disaster. But a government of national unity could start tackling the key problems by bringing the two sides of industry together, tackling investment needs and labour market reforms.
Getting the unions on board while stimulating new enterprise and employment by deregulation is the goal, I thought. Can German industrialists be convinced that they have to take social matters into account for the good of their own profits? Can the unions be convinced that in exchange for concessions on employment protection, the existing major employers will not seek to maximise shareholder value whatever the social cost? if so, what is the best government to preside over such reforms?
Historically in Europe, I think it’s been a government of the right applying the reforms kicked off by the left, but a coalition might work well too. The East would be very resistant to the CDU, and Schroder and allies aren’t pushing quite hard enough and don’t have the support of the empoyers. Could be a disaster if it becomes self-neutralising too, I suppose.
Edward, I honestly didn’t understand your final comment even after I Googled “Elga Bartsch.”
It seems to me the Morgan Stanley report makes a fairly straightforward and seemingly obvious argument: a grand coalition — sorry, but why is that phrase in italics throughout as though it’s Latin? — would mean gridlock because the parties are so far apart on important issues.
Yet doesn’t this completely fail to address the fact that Merkel’s CDU has blocked recent reform proposals by Schroeder’s SPD basically because they weren’t CDU proposals? Am I mistaken on this point?
Are the parties actually that apart on the issues? In fact, looking at the big picture, doesn’t everybody with half a head on their shoulders know that reforms are necessary and basically inevitable? It seems it’s just pretty politics standing in the way.
Isn’t therefore a grand coalition — sorry, a grand coalition — therefore the best possible outcome?
Am I missing something?
“could start tackling the key problems by bringing the two sides of industry together, tackling investment needs and labour market reforms.”
Of course, if these were the only outstanding issues, you might be right. I wouldn’t be against a coalition in principal, and if, as you sometimes suggest, patriotism (in the weak sense) could be used to mean that people sacrifice individual interests for the common good, then right on. But I have my doubts.
Firstly I worry that Germany’s problems have been wongly (or incompletely) diagnosed – and I’ll get round to Scott’s point on Elga Bartsch on this in a minute – and I worry that a national unity government that doesn’t succeed can open the door to extremism through frustration over the mid term. On these grounds alone I would be very cautious about having a ‘grand coalition’ in Germany, it blocks-off the normal safety valve outlets.
Now, “tackling investment needs”: the problem is John that the Germans are saving but not investing sufficiently. In fact, far from getting into debt, they are gradually paying off (on aggregate) their indebtedness. This has exactly the opposite effect on domestic consumption that the credit boom in the UK has been having.
The complicated thing is that, according to the most recent research, this is age related. Unfortunately at present most of the relevant material is still in fairly dense academic papers, and the implications haven’t worked their way down to the high street awareness level yet, but they will do. Here is one example of some work:
http://www.sensiblepolicy.com/download/esrimckibbin3.pdf
It is fairly technical, but if you read the intro, the conclusions, and some of the blurb in the middle, you should be able to pick up that something important is afoot.
So investment in Germany is only likely to be really driven by exports and growth elsewhere, otherwise the Germans are going to become rentiers, exporting capital and living off the income.
Now, on the labour market reforms I think you can get agreement, it will be on how to pay for them that the issues arise. Merkel, as we know, has been proposing a rise in the VAT consumption tax. This will only help reduce internal demand growth even further, and the SPD economists reciognise this.
And then there are the ongoing reforms which are seriously needed in health and pension system costs. The increase is structurally imbuilt through ageing, and the lack of growth makes it impossible to continue paying at existing levels. So push has come to shove.
Fiscal policy generally has to tighten, since the deficit has to be gotten back under the 3% at some stage or other, so where are the cuts going to come? This is the big question, and this is where I don’t see agreement between the parties coming since they both have to face an electorate where these things will be unpopular. I don’t think it will work.
“basically because they weren’t CDU proposals? Am I mistaken on this point?”
Yes Scott, I’m sorry to say it, but I think you are. I don’t think this is simply partisan in that sense. Principally the CDU was driven to oppose by its electoral base, and this is going to continue to be the case. The win-win, free lunch for everyone scenario just isn’t available, someone is going to feel the pain, and part of the battle between the parties is about whose electoral base is going to take the worst hammering. In some senses the CDU is going to be more conservative about reforms than the SPD since it is likely to appeal to a slighly older group (on aggregate), and this group will be more in favour of the labour market reforms and much more resistant to changes in pensions and health care – think Bush and medical prescriptions for pensioners in the US.
“doesn’t everybody with half a head on their shoulders know that reforms are necessary and basically inevitable?”
No, I’m afraid this just isn’t true.
“I honestly didn’t understand your final comment even after I Googled “Elga Bartsch.””
OK, now for this bit. I actually had two topics in mind. Firstly the fact that googling for Elga Bartsch (who is the most widely quoted German economist in some parts of the European press) brings up an Afoe post as number one in the search list must drive some people somewhere crazy (and with power must come responsibility 🙂 ), but more importantly it is to indicate that while I agree with the general point she is making about the coalition, I do not agree with her overall analysis or remedy. Elga Bartsch is an advocate of indirect wage deflation (well, was, since she may be now happy with what has already been done). I reluctantly accept that there may be no alternative to this, but was saying at the time that internal demand would be negatively affected, and hence this wouldn’t put Germany back on a higher growth trajectory. I think time is proving me right here.
Well, when in doubt, I tend to think the conventional wisdom is usually correct, and the conventional wisdom agrees with you that a grand coalition would be bad for the economy:
http://www.dw-world.de/dw/article/0,1564,1659663,00.html
Maybe the problem is that an outsider like me cannot understand why anybody in their right mind would think that economic reforms in Germany are unnecessary. Then again, as we saw in November 2004, it’s not outsiders that decide the fate of democratic nations…
Now I?m confused. I?m aware that the main German central banker recently more or less told the Germans, ?go out and consume, you ? ! ? but isn?t the employers? call for reform based on the idea that they?re reluctant to invest because they need greater flexibility in firing people ? not just because they need greater demand?
And isn?t the unions? main fear that their members will be asked to carry the whole cost of creating a more favourable climate for investment, especially investment in new enterprise?
We?ve heard at length about how social costs are high in Germany and how the Ossies don?t put in a decent day?s work. Presumably, some German employers ( and dear Elga?) dream of doing some kind of Gate Gourmet number, (I?m looking forward to your post on this : ) and replacing existing staff with cheaper East European immigrants, but I?d have thought that would only work for the economy as a whole if growth was export led.
Wage deflation strikes this non-economist as a poor solution for an under-consuming economy. Greater employment flexibility, however, might just work, but only if the employers are genuinely committed to link wages to productivity, so that the unions can sell a deal to their members: If the main problem for Germany is the unforeseen high cost of incorporating the East, then perhaps they?ll have to make people feel that having disposable income is more urgent ? e.g. solve the budget problem with a substantial VAT hike, etc. But getting people to want to meet raised productivity targets seems to me, in my ignorance, to be central.
If the consumption problem is the age pyramid spending pattern, then perhaps it?s a question of adapting to a replacement rather than new purchase pattern? Make people feel that replacement is more urgent by offering a raft of new features.? Difficult with a washing machine I suppose, but surely all the tech we have now could be put into some attractive gimmickry. Or perhaps German industry needs to rethink what it is that its consumers in the East want so much that they’ll slave for it, and that it may be different from what the Wessie consumers they’re used to catering for want? Are there any stats on how the demand breaks down across the Lander?
“If the main problem for Germany is the unforeseen high cost of incorporating the East”
It is here John where I think we are talking at cross purposes. I think the Eastern assimilation has been obviously a contributing factor, but I am trying to move us on from the previous consensus view that this was the key issue. I think rather than go into more here, it is better to refer you to the debate on the Japan post.
“Are there any stats on how the demand breaks down across the Lander?”
No, but I imagine it follows age (with an opposite sign) and income, lowest in the East, next in the old industrial North West, and highest in Bavaria.
“only if the employers are genuinely committed to link wages to productivity,”
I think John, that the problem is that German companies have been extraordinarily successful in raising productivity at the micro level, and German firms are very competitive and successful at selling abroad, it’s the home market that’s the problem.
“dream of doing some kind of Gate Gourmet number”
Again fair argument, you need to get people into higher value added jobs on average, not lower value added ones. (Incidentally, Germany seems to have missed out on a lot of very talented Central Europe migrants from the most recent blurb I read from the UK, apart from London Transport an interesting proportion seem to have filled junior management positions).
Incidentally as we get to understand all this better (remember in meaningul terms this has never happened before, oh I know the black death and all that, but……) there will turn out to be a number of fairly available practical things we can do. One of these will be to make more effort in school to educate young women about the dangers of postponing childbirth too long (see my Menarche post about to go up later this morning). Since we don’t want to slow down human capital formaion this may mean significant changes in education to make being a mum compatable with study, like distant learning etc. A lot of interesting win-win possibilities like this could open up if only we seriously started to apply our collective minds to the problem.
“Are there any stats on how the demand breaks down across the Lander?”
No, but I imagine it follows age (with an opposite sign) and income, lowest in the East, next in the old industrial North West, and highest in Bavaria.
Why? Savings go up with income and the recent reforms in unemployment benefits actually increased benefits going to the eastern states.
“No, but I imagine it follows age”
Just correcting an error in my original response on this, it shouldn’t have been ‘no’, but ‘I don’t know’.
On Oliver’s point – Savings go up with income – well generally this is true, but there are times of course when a little more income helps you get more credit, so in the lower income groups – and you are talking about people on benefits here – this isn’t necessarily very clear.
For what it’s worth (from SZ)
West + Berlin: 14110
East: 11760