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Beggar-Thy-Neighbour: German Politics Spell Trouble Ahead for the Eurozone

Updated: Apr 6, 2021

With most news fixating on Covid-19, the election of Armin Laschet as Angela Merkel’s successor at the ruling CDU Party in Germany has proceeded without much fanfare. Be that as it may, politicians and economists, especially at the peripheries of the Eurozone, are very worried. This worry arises not because of what Armin will do, but because of what he won’t! Laschet is a business-as-usual centrist, with unimaginative policies that are just what you’d expect from a career politician (excluding his brief stint in the publishing industry). Add to this his status as Merkel’s own preferred heir, and the certainty of his toeing the party line becomes painfully evident. In this article, I try to explore why this makes Laschet so problematic for the future of the European Union.

Arguably Merkel’s greatest legacy to Armin and the CDU is austerity, imposed both at home and abroad. German economic policy, over the last few decades, has been marked by an almost-religious (and, by some accounts, actually religious) hatred of any kind of debt or spending. This approached fanatical proportions when, under Chancellor Merkel, Germany constitutionally barred itself from taking on more debt, through a law called the “black zero.”

This fiscal conservatism led to the maintenance of a truly massive current account surplus (by far the largest in the world), by operating an export based economy with domestic demand too low to import anything in return. Germany has been parasitically leeching money from all the other Euro nations by force-feeding them German goods to maintain this surplus. These lopsided trade flows have gone hand-in-hand with the hoarding of capital in German banks and financial institutions. But the miserly aversion to spending and stimulus has meant that none of this capital gets mobilised within Germany, and macroeconomic indicators remain sluggish. Obviously, one recourse for German bankers has been to deploy this capital abroad by spearheading indebtedness in other Eurozone countries, thereby propping up catastrophic bubbles (such as in Greece). Clearly, while campaigning against debt, Germany under the CDU has always been comfortable subjecting others to German debt.

This ideology leads to peculiar results. Consider the previous example of Greece: when the Greek economy collapsed and debtors were unable to pay back their overlords in Frankfurt. The German “aid” to Greece did nothing to prop up the state, businesses, or households – debt relief was practically earmarked for repayment of debt itself, not boosting the economy. In other words, when risk blew up in German banks’ faces, the Merkelian solution was to simply launder public money into German banks via Greek coffers. While bankers enjoyed the security given by the CDU, Greece – even before the pandemic struck – had a worse debt-to-GDP ratio than it did during the height of its debt crisis! Evidently, Germany has no problem with those who supply bad debt, but only with those who accept it.

The more Panglossian among us will point to Laschet’s alleged criticism of Greek austerity as a redeeming factor. But it only takes a quick summary of what Laschet opposed – giving the most indebted country in Europe even more debt, then asking them to achieve a 3.5% primary surplus in the middle of an unprecedented depression – to see that to critique the Greek program is not a sign of sensible economic policymaking, but of basic sanity. And, regardless of his lukewarm criticism of the program, he is unlikely to deviate from such policies when in power – both due to his tendency to unthinkingly follow party directives, and his own lack of interest in effective, decisive, and creative governance.

We don’t need to go far to find examples. Due to the pandemic, Germany had temporarily suspended its “black zero” rule (the law preventing the German state from taking on debt) to stimulate the economy and provide the slimmest glimmer of hope to the Eurozone, and it was widely believed that the rule was gone for good. But Laschet’s economic extremism has already begun to appear: he has thrown his weight behind reinstating the debt-brake law in 2022, a time when it is certain the economic recovery will be far from complete. It now seems inevitable that German purse-strings are going to tighten soon, suffocating the peripheral Euro economies with them. The European Central Bank (ECB) has already been pushed to its legal and economic limits in trying to prop up the economy, and even there it was Germany, its biggest shareholder, that reined it in from taking more decisive action. Certainly no other country has as much fiscal room as Germany, but it does not seem likely that Laschet will do anything positive with the opportunity he has been given. In the absence of deep and significant structural changes to the German economy, and the German-controlled ECB, a pan-European debt-deflation spiral seems to be on the horizon.

Business-as-usual politics in circumstances that are anything but usual is exactly the Laschet brand, which seems poised to win the Chancellorship of Germany, and thereby also control over the Eurozone’s trajectory. The terms Merkel and Laschet have dictated for the EU seem almost too bad to be true. Countries like Greece, Ireland, Portugal, and Spain will pay the heaviest price for German stinginess, as Germany itself continues to demand the European public underwrite German private risk.

Two hypotheses exist for why Germany continues down this destructive path: First, that they simply do not grasp the fundamentals of macroeconomics; or second, the more terrifying prospect, that when they said “Deutschland, Deutschland über alles,” they meant it.

(Written by Aditya Tiwari and Edited by Aarushi Kataria)


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