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No More Singing the Austerity Blues?

Germany’s Social Democrat leader tries to change the euro tune to little avail
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Deputy chancellor Sigmar Gabriel argued this week that it was time to turn the page on austerity policies. But there is little chance of him bringing about a change of course. Rather, the return of the Greek crisis has underlined how little influence Germany’s Social Democrats have shaping euro-saving policies.

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(c) REUTERS/Hannibal Hanschke

 

It’s time to change the record on Europe. That was the message of Germany’s Social Democrat (SPD) leader Sigmar Gabriel at a conference organized by his economics ministry this week in Berlin. After years of Europe singing the austerity blues, the centre-left leader insisted it was time to start the stimulus stomp.

For Germany’s European neighbors, in particular countries on the crisis-wracked periphery, this sounded like a welcome change of tune. But after so many false dawns, is there any real hope that Berlin is really ready to turn the page on austerity?

Gabriel, deputy chancellor in Germany’s grand coalition government, seems to think so. He senses that the wind is changing in Europe under the Juncker Commission, pushing now towards a greater push for investment and fiscal flexibility, and it’s wind Gabriel hopes to catch in his SPD sails to lift his party in polls at home.

That was on Gabriel’s mind in a keynote speech that demanded that the EU spend as much time and energy pushing investment as it does policing deficits. Gabriel made a double-headed proposal. First: Raise the Maastricht deficit ceiling from 3 to 3.5 percent of a country’s GDP. The extra borrowing could be used on investment in sensible measures to boost competitiveness – not senseless motorways to nowhere, but overdue broadband in rural areas.

Gabriel’s second proposal: Lay down investment targets in the eurozone rulebook that are as binding as existing deficit rules. “Why are we so precise when it comes to reducing deficits and so general when it comes to growth?,” he asked.

But Gabriel knows it will take some work to convince people of his proposals in rules-obsessed Germany. Many people here view the euro rescue strategy as a betrayal of the euro rulebook, in particular the no-bailout clause laid down in the Maastricht Treaty to encourage Germans to give up their deutschmark for the euro. Watering down this same Maastricht Treaty even further now is a no-no for them, particularly when demanded by an SPD leader.

A decade ago a predecessor of Gabriel’s, SPD Chancellor Gerhard Schröder, joined forces with France and lobbied successfully for the stability pact deficit rules to be watered down. For many Germans, in particular Chancellor Angela Merkel and her CDU supporters, this was the original sin. When the eurozone’s two largest members disregarded the rules, they say, the rest of the bloc embarked on a debt-fuelled spending binge and started down the slippery slope to the euro crisis.

Gabriel disagrees. While France simply ran up more debt, he says the decade-old rule change allowed Berlin – then in a economic downward spiral – to free up €20 billion for investment while ramming through labor market reform. If Germany had tried to simultaneously reform and cut back its budget to meet euro targets, Gabriel said, “resistance would have been so great that I think we’d have achieved neither.”

Thus his message to the EU conference: Recent German history shows that reforms combined with investment and fiscal flexibility are more effective for struggling countries than undiluted austerity reforms – such as those prescribed for Greece. Not changing course to break the “downward spiral” caused by austerity, he said, will weaken European economies further and stoke up further anti-EU populism around the continent. Such populism is no stranger even in Germany, he said, pointing to the “growing myth that we are the mule in Europe,” shouldering all the burden rather than profiting from the EU.

It was interesting listening, and comes amid a wider pushback in Germany against the dominant ordo-liberal “save-first, spend-later”-dogma. The problem for the deputy chancellor and his SPD party is that, though they are trying to break free from their coalition partner, they are still willing captives in the Merkel euro crisis maze.

In this maze, the eurozone crisis was not caused by a malfunctioning of many moving parts in the currency union, but solely by profligate crisis countries. Merkel’s logic that this is a debt crisis is, despite his claims to think differently, Gabriel’s logic too. A few conference participants challenged this, pointing out that German banks and investors did great business in Greece and Ireland until the music stopped – but those are lone voices in the German debate.

That is what is so disheartening about Gabriel’s latest attempt to change the narrative: it doesn’t question how Europe got into crisis, and thus colors how to think about getting out. Gabriel’s reticence for a radical rewrite of Germany’s crisis narrative is understandable: a change of direction now would only raise uncomfortable questions. Such as why, if Merkel’s austerity medicine is so bad, did the SPD back – or at least not block – the prescription in the Bundestag?

Looking on from the opposition benches, the Greens are skeptical their traditional coalition partner SPD can break out of the Merkel crisis maze. Sven-Christian Kindler, Green budgetary spokesman in the Bundestag, sees “no real difference” between how the SPD and CDU have diagnosed of the root cause or the road forward. “The rhetoric is sometimes a little different here and there, but the SPD is basically helping carry the Merkel-Schäuble austerity politics in Europe,” he said.

So what is the likelihood of a change in direction from Berlin with the SPD at the rudder?

The return of the Greek crisis has only underlined how little influence the SPD has on euro politics.  While the new investment debate is under the control of Gabriel’s economics ministry, the CDU still controls the finance ministry and chancellery where crucial policy – including the approach towards Greece – is determined.

Even if there is a concerted pushback against austerity towards what Gabriel wants, a more balanced policy of stability AND growth measures, long-term Merkel watchers know she is unlikely to allow her coalition partner to take the credit.

Instead the German leader will shift gears, elbow aside the SPD, and claim credit for the change of course in Europe towards a brighter, prosperous tomorrow.