Germany’s political and economic phoney war

May 1, 2009

paul-taylor— Paul Taylor is a Reuters columnist. The opinions expressed are his own —

Germany is becalmed by a political and economic phoney war five months before this year’s most important European general election. But a lack of real economic debate now risks prolonging the political stalemate and delaying much needed reforms.

The export-dependent economy is shrinking faster than any other major economy except fellow exporter Japan. Output is expected to contract by an eye-watering 6 percent this year. German banks turn out to have bought as many toxic assets as their British or American counterparts, proportionate to their balance sheets.

Yet the grand coalition government has just reaffirmed, with broad political backing, that there will be no new stimulus package. And there is little public debate about whether the government has the right economic strategy.

When the Social Democratic challenger for the country’s figurehead presidency, Gesine Schwan, warned last week of the risk of social unrest, her comments were widely dismissed.

Schwan said the mood could turn explosive later this year when hundreds of thousands of people surviving on short-time work thanks to Germany’s social safety net become unemployed.

But opinion polls suggest most of the 82 million Germans are resigned to seeing their income fall this year due to the global economic crisis, and two-thirds do not believe that government stimulus packages adopted so far will be effective.

Unlike France, which faces a milder recession, there are no mass protests or wildcat kidnappings of bosses in fury at layoffs or factory closures. German trade unions sit in boardrooms and share responsibility for the fate of industry. Labour representatives have accepted pay cuts or longer working hours to save jobs and firms.

“More than half the population expect they will have to scale back their standard of living, especially in the east and among the poor,” says Manfred Guellner, head of the Forsa polling institute. “There is no dramatic impact on the political mood. The crisis is seen as the fault of distant, unclear forces and the government is not blamed.”

Conservative Chancellor Angela Merkel is still sharing power quite harmoniously with her Social Democratic rival in the Sept. 27 election, Foreign Minister Frank-Walter Steinmeier, and with Social Democratic Finance Minister Peer Steinbrueck.

Politicians from both governing parties trade attacks on weekends but work together pragmatically during the week. They are putting finishing touches to a scheme to create “bad banks” to get toxic assets off German banks’ balance sheets and allow them to be unwound over several years. And they are jointly looking for a buyer for trouble car maker Opel, the German unit of stricken U.S. giant General Motors, to avert mass job losses with knock-on effects in the supply chain.

The centre-right Christian Democrats (CDU) and centre-left Social Democrats (SPD) appear to feel voters would not reward adversarial politics in the midst of such an economic crisis, or at least not until the final weeks of campaigning.

To the outside world, this may look like complacency in the face of the worst crisis since the creation of the Federal Republic in 1949 but to most Germans it looks like common sense.

The CDU hopes to govern next time in coalition with the pro-market liberal Free Democrats (FDP), and the SPD would prefer an alliance with the environmentalist Greens. The former seems more plausible than the latter. But both major parties are aware the electoral arithmetic may force them kicking and screaming back into each others’ arms.

That would be a dreadful outcome, condemning Germany to another four years of stifling consensus and little reform. The grand coalition enacted a flawed health reform, restored public finances to balance before the crisis struck but dodged other structural problems in education, ageing and the tax system.

The opposition FDP has gained most from the economic crisis so far in voting intentions. The smallest mainstream party, which has sometimes struggled to jump the 5 percent hurdle for seats in parliament, now has around 14 percent support. That score reflects disenchanted middle class and business voters who have deserted the CDU because Merkel is seen as too conciliatory to the SPD and loath to cut taxes.

By contrast, the Left Party, a mix of former east German communists and disenchanted former Social Democrats, has lost ground in the polls. Support has fallen below 10 percent because it is not perceived as having credible policies on the crisis.

The campaign for June 7 European Parliament elections, a dry run for September, is barely visible. Surveys show most voters are not even aware the EU poll is taking place, and turnout could be below the record low of 43 percent in 2004.

The battle of Berlin will only begin in earnest once Germans return from their summer break in August. Despite all denials, more economic stimulus measures should not be ruled out at that stage.
(editing by David Evans)

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