German elections bring forward a possible stalemate situation for EMU
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
Next month’s UK general election is not the only one of significance in Europe. There is the possibility that the German regional elections in North Rhine-Westphalia on May 9 could result in the end of the CDU/FDP government’s majority in the upper house of parliament.
While this would not alter Angela Merkel’s status as Chancellor, lessened support would make it more difficult for her to implement planned tax cuts and health services reforms. Fear that she may lose support in NRW is currently delaying the transfer of a German loan to Greece. In turn this means the markets are bracing themselves for a possible default in Greece; an event which could change the present composition of the Economic and Monetary Union of the European Union.
German popular opinion is firmly set against the notion of providing loans to Greece; although Germany as the largest EU economy is obliged to lend around 8.4 billion euros to Greece very soon to help the latter avoid default. While the election in NRW will not be fought on the subject of Greece it does give an added edge to concerns about lack of fiscal manoeuvrability in the region.
NRW has had to issue a record 27 billion euros this year. Over the past 10 years or so the amount of debt per capita has soared. This increase in debt and the possibility that the level of local services will have to be cut to meet fiscal consolidation targets does not sit happily with the notion that German taxpayers may have to make funds available to Greece.
Andreas Pinkwart, the Deputy Leader of the government’s junior coalition partner the FDP has described the prospect of a German loan to Greece as a “slap in the face of German employees”. It is unlikely that sentiment within the cash strapped economies of Spain, Ireland and Portugal has warmed to the topic of a bailout for Greece either.
Germany’s unwillingness to put its hands in its pockets to prevent a Greece default opens EMU to yet further criticism that it is a deeply flawed system. It has been clear for some time that the Stability Pact provides inadequate fiscal controls but if German pockets prove to have limited depth, then the ability of EMU to muddle its way through this crisis is significantly lessened.
To meet its May funding requirement, Greece needs to borrow around 10 billion euros from somewhere. The IMF will probably make the funds available even if Germany delays. However, Greece’s funding problems will not end until it can prove it can live within its means. Even if Germany lends money soon, more demands from Greece or from another peripheral country could follow.
At the heart of the imbalances within EMU is that many countries need to make huge leaps in competitiveness in order to keep pace with Germany. Without the ability to devalue their currencies workers will have to see the relative level of their wages drop instead. The alternative is that Germany stimulates domestic demand to absorb the exports of its EMU neighbours.
Returning to NRW, however, there is little appetite for additional spending. If relative wage cuts prove too big for Greece to tolerate (and for other EMU countries struggling under large deficits) and if Germany has no appetite either to boost its domestic demand or send bailout payments, then EMU could be approaching a stalemate situation. Devaluation (exiting EMU) or default starting with Greece remains a possibility. The alternative is that Germany could remove itself from the system; a move which would almost certainly result in the collapse of EMU.