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Germans vote for change; will they get it?
Germans 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.
Ireland’s property bank stores up trouble
Most buyers are happy if their putative purchase gets cheaper. However, Dublin’s government is watching the on-off liquidation of developer Liam Carroll’s assets with trepidation.
Dublin has committed to acquiring property loans with a face value of some 90 billion euros from the country’s beleaguered banks at a so-far unspecified discount to establish a “bad bank”. The idea is that by removing such loans to the new National Asset Management Agency (NAMA), the banks would be free to start lending again.
In principle, you might think that ministers would want that discount to be as fat as possible. A fire sale of the property assets of one of Ireland’s biggest developers should show just how far prices have really fallen.
However, opposition politicians believe that the government wants to overpay for the loans. They have fixed on finance minister Brian Lenihan’s promise that the state would pay the “long term economic value” rather than today’s depressed market price of the underlying loans.
Richard Bruton, finance spokesman for the Fine Gael party, warns that “taxpayers will be forced to overpay the banks for toxic developer loans. Rosy and baseless optimism about a recovery in property prices can hobble the public finances for a generation.”
Moreover, the opposition is worried that the banks may be colluding in trying to keep developers like Carroll afloat long enough to offload their loans into NAMA. There is plenty of evidence that banks are rolling up interest on developers’ loans rather than pulling the plug.
The case of Carroll is instructive. Only one of his eight lenders has pushed to have a liquidator appointed. ACC Bank, which is owed “just” 136 million euros, out of more than 1 billion (Carroll’s entire empire is estimated to owe 2.8 billion), pulled the plug. Owned by Rabobank, which has decided to exit the Irish market, it has little long-term interest in playing a longer game.
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The Wall
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.