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Germans vote for change; will they get it?

By Paul Taylor
September 27, 2009

angieGermans have voted for change. A centre-right government with a clear parliamentary majority will replace the ungainly grand coalition of conservatives and Social Democrats that ran Europe’s biggest economy for the last four years.

This should mean an end to ”steady as she goes” lowest common denominator policies, and at least some reform of the country’s tax and welfare system. The liberal Free Democrats, who recorded their best ever result with around 14.7 percent, will try to pull the new government towards tax cuts, health care reform, a reduction in welfare spending and a loosening of job protection in small business.

Conservative Chancellor Angela Merkel, a cautious centrist, made clear in her first post-election comments that she she would not allow a radical lurch to the right. She promised to be the ”chancellor of all Germans” — old and young, entrepreneurs and workers — and said the conseravtives would be sufficiently dominant in the new coalition to prevail “in questions that affect social balance”.

The new government faces tough economic challenges in what is bound to be a more polarised political atmosphere, with the Social Democrats in opposition. The economy is expected to contract by at least 5 percent this year, and export-led growth is likely to return only slowly. Unemployment is set to explode in the coming months as short-time work schemes run out. The budget deficit is set to top 6 percent of gross domestic product next year, more than twice the EU limit. So 2010 will be an extremely difficult year. But there are some problems that are even more urgent.

The first big choice involves Germany’s ailing banks. Outgoing Finance Minister Peer Steinbrueck admitted last week that the public-owned regional Landesbanks “continue to pose an enormous systemic risk to our market”. The outgoing parliament passed a virtually useless “bad bank” law meant to encourage stricken financial institutions to put their toxic assets into state-guaranteed special purpose vehicles. The banks have so far spurned the system because it leaves the risk of losses with them rather than with the taxpayer.

Merkel and her new partners need to amend the law so that the state takes more of the risk, otherwise Germany faces a future of “zombie” banks that are too burdened with liabilities to lend to the real economy. That won’t be popular, with the left bound to claim that taxpayers are being forced to bail out wealthy bankers.

Fixing the banks is more urgent than cutting taxes or curbing public spending to revive the economy. That also means merging the Landesbanks, shrinking their activities and privatising as much as possible. The Germans must also be ready to allow healthy foreign banks to buy up sickly German ones. That is the logic of the European single market, to which a centre-right government is likely to be more committed.

That brings us to the next urgent priority. The new Berlin government should reconsider the dodgy deal it clinched on the eve of the election to rescue the ailing Opel auto manufacturer. Germany promised billions of euros in state aid for a consortium of car parts maker Magna and Russia’s Sberbank to take over General Motors’ European arm in order to preserve four production sites and as many jobs as possible in Germany.

The European Commission has made clear that “bribing” companies to skew restructuring plans according to national interests breaches EU rules. Merkel should seize the opportunity to seek a deal with other countries with Opel and Vauxhall production sites to co-fund a restructing plan along strictly commercial lines. In the longer term, Opel will need a bigger industrial partner to achieve critical mass in the inevitable consolidation of European auto sector.

Fixing the banks and Opel will be the first two tests of whether Germany gets the change it needs. Tax cuts and welfare reform will take longer and be trickier, especially given the burgeoning budget deficit and debt mountain.

Comments

Dear Writer,
Your article on recent German election results and for future political forecast are very fine, interesting to get lot of comments from many well readers on economics,particularly from German thinkers and from many world political leaders.
My predictions of Mrs.Merkel victory on this one sided election became true.
Yes.She has emerged a world famous political leader and for her country.
I have already posted my comments in BBC Have Your say,after getting latest news from New York Times.
Her latest tackling worse recession,economic collapse,job losses and panic moods from Germans were handled in very practical ways.
Whereas , America and UK had not solved their problems on war footing ways.
Good news ,we are getting from Germany and to rest of this world.
I wish that,Germany will be prosperous on many fields in future days,months and in future years.
Congratulations to her for entering to second term as a Chancellor in Germany.
After a great German Chancellor,Merkel had created a noted history on Germany political map.

 

“That also means merging the Landesbanks, shrinking their activities and privatising as much as possible.”

How would privatising the banks solve the problem? Did you not notice, that the USA’s wild privatisation and deregulation of the banking sector led to the subprime mess and the collapse of the US economy? (Which in turn caused misery for Germany and brought its economy into recession.)

It truly boggles the mind, that some foolish commentators– even in the wake of the disasters from US neoliberal economic policy and Reagan-Thatcher deregulation– are still advocating for the same stupid deregulation and laissez-faire. A free and unregulated market is a great thing for technology innovation in Silicon Valley– it’s a terrible thing for banks and insurance companies, whose “innovations” generally consist of increasingly idiotic ways to screw over taxpayers and bloat costs, as health insurance companies in the USA do. Remember how Margaret Thatcher privatised British utilities and gutted Britsih manufacturing? It’s now made the UK disastrously vulnerable– with poor (and exploitative) utility service and the lack of an export industry. The Germans aren’t stupid enough to do the same thing.

What the world needs now is less ridiculous privatisation and laissez-faire deregulation, and more managed capitalism and managed markets. Too many businesses in the USA and Britain enrich themselves at the expense of the country’s sustainable health. We should encourage business but curb the excesses, and make sure people are confident enough to train for their jobs, start families and so forth. The US-UK system of mass deregulation and privatisation has just been a disaster.

Germany, for its part, would do best by stop kissing up to the USA (with our failed economic model) until we wise up and get our house in order. Germany should instead focus its economic and cultural links on Russia and China– the two big, growing and most relevant export markets. (With Brazil, India and Latin America as secondary markets.) That will give them the best leverage.

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BTW, the CDU’s victory here was hardly resounding– it was, in fact, their second-worst electoral showing since 1949. (The three minor parties benefited at the expense of both the CDU and the SPD.) The SPD lost, frankly, because Steinmeier and the Social Democrats stupidly embraced Turkey joining the EU, which just about nobody in Germany supports– why would you let in 72 million poor workers to freely immigrate in, when you own economy is still struggling? The SPD, Labour in Britain and the Socialists in France– these Left parties used to do well when they emphasized *help for the lower classes* and social safety-net support, but remained nationalistic. Now, Europe’s Left parties have stupidly advocated Cultural Marxism rather than economic fairness– advocating for open borders and flooding their densely-populated European countries with millions of immigrants, in countries that aren’t “nations of immigrants” like the USA– ironically lining up with the worst of big business, who want to do the same to get cheap labor. So the Left parties like SPD have undercut their own legitimacy.

As soon as the SPD stops stupidly advocating for Turkish accession to the EU, and refocus on economic fairness, they’ll gain more votes and regain their popularity. It should be common sense.

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