Mrs Merkel’s fourth term economic headaches
German Chancellor Angela Merkel will face her fourth general election next Sunday, 24th September. Opinion polls strongly suggest that she will win a fourth term forming a coalition with one or more of f the other parties. Attention will then shift to the policy issues facing Mrs Merkel in what is assumed to be her final four years of a 16-year period as Chancellor, making her the equal longest in post-War Germany along with Helmut Kohl.
Germany’s buoyant economy is a bonus for Mrs Merkel
One reason Mrs Merkel looks almost certain to win on Sunday is the strength of the German economy. Over the last year (four quarters ending June) GDP has grown by 2.1 per cent and in the first half of this year the pace quickened to an annualised rate of over 2.5 per cent. Meanwhile, unemployment is at a post-reunification low of 3.7 per cent, down half a percentage point over the last year. Not that this has an awful lot to do with the policies of Mrs Merkel and her governments over the last 12 years. The European Central Bank has cut interest rates to extremely low levels and is still engaged in monthly asset purchases of €60bn a month. In addition it is the labour market reforms of her predecessor Gerhard Schroder that introduced the flexibility that has resulted in such a buoyant labour market today. Nevertheless, Germany has recovered strongly from the great recession of 2008-09 with the public finances now back in surplus of just below 1 per cent of GDP.
Population growth is a domestic challenge
Perhaps the biggest domestic challenge facing Mrs Merkel is undoubtedly one of her own making – the decision to let in over one million refugees in 2015 and 2016. The effect of this has been to boost Germany’s population to a record high of 82.6 million, passing the previous peak reached in 2002. Over the last three years the German population has jumped by over 2 million, almost entirely through net migration. The total is greater than the sum of all migration over the previous 15 years. It has boosted Germany’s population by over 2 per cent and has improved Germany’s demographics through an increase in the proportion of younger people in the population. But the integration of such large numbers into the labour force and wider economy is a huge domestic challenge in coming years. Its success will be crucial if Germany is to maintain its current improved economic performance. Given the low skills of the vast majority of the recent influx there will be implications for GDP per head and labour productivity
But the Eurozone still needs fixing
But the eurozone is likely to become a dominant issue over the next four years. The election of Emmanuel Macron as President of France has given renewed momentum to the cause of further political integration. M Macron has proposed a Eurozone Finance minister with a budget to match. In principle Mrs Merkel has agreed to this but has parked the issue until after the German election. The time is indeed ripe for reform, not only from a political perspective but from an economic one too. The Eurozone economy is currently growing at the fastest rate in 10 years – in the four quarters to June GDP grew by 2.3 per cent boosted by a long-awaited rise in consumer spending. As usual there is a wide range of growth rates among the 19 members of the Eurozone, ranging from 0.3 per cent in Portugal to 1.5 per cent in the Netherlands. Meanwhile, average unemployment has fallen to an eight year low of 9.1 per cent, although it varies from 3.7 per cent in Germany to 21.7 per cent in Greece. Such relatively benign economic conditions are a much better backdrop in which to do reforms than the crisis conditions experienced when Greece teetered on the brink of default on a few occasions in recent years.
Merkel and Macron have different visions for the single currency
But Merkel and Macron are not likely to agree on what steps should be taken towards fiscal union as they approach the issue from somewhat different angles. M Macron prefers a centralised approach with significant tax and spending powers on a pan-eurozone basis administered by a Minister of Finance. Mrs Merkel is thought to prefer a more decentralised approach with greater obligations on nation states to improve the flexibility and functioning of their own economies. No doubt this view is driven to a large extent by the knowledge that for the foreseeable future Germany will be the ultimate guarantor of the consequences of any pan-Eurozone fiscal largesse. So while Mrs Merkel has agreed to the concept of a Minister of Finance for the Eurozone she is not likely to sanction significant resources for this purpose. Any (extremely modest) progress in the direction of fiscal union will probably require as a quid pro quo French labour market reform along the lines done in Germany almost 15 years ago.
Survival of the Eurozone would be an achievement in itself
History suggests that monetary unions only survive if they also become political unions underpinned with a fiscal authority. The debt crises in Greece earlier this decade triggered the start of this with moves towards a Eurozone banking union: regulatory powers over Eurozone banks now reside at the European Central Bank. The Eurozone will never be a successful monetary union in the sense of converging real incomes and business cycles across all its members. But it may survive if there is ultimately political union too. Perhaps Mrs Merkel’s main legacy when she eventually leaves office will be that, under her watch, the Eurozone held together. This may not sound like a great achievement but given the deep structural flaws embedded in the single currency it would in fact be no mean feat.