A tale of two countries
President Nicolas Sarkozy made an important announcement in Warsaw last week. From July, the Polish plumber and other citizens of the 2004 accession countries to the European Union will be able to work freely in France – a year ahead of schedule and three years ahead of the final deadline. It is probably the most significant measure of liberalisation undertaken by his administration. There have been other reforms, nothing truly radical so far, but the process is continuing.
On the other side of the Rhine, the last notable reform dates back to late 2005, when Germany’s “grand coalition” decided to raise the pension age to 67 years. (I do not count a corporate tax cut as a structural reform). What has followed is not only an absence of economic reforms but also anti-reform. Some of the welfare changes initiated by the previous government were reversed. There are new minimum wages in several sectors. The trade unions have since experienced a renaissance in membership and negotiating power. It is out of the question that Germany will even consider opening the domestic labour market to the accession states ahead of schedule. Germany’s borders will remain firmly shut for another three years.
So I ask myself: why is everybody so negative about France and so positive about Germany? The only explanation is that people naively extrapolate recent performance. Of course, Germany has enjoyed a great export-led economic recovery since 2006. But it has been because of two transient phenomena. The first is the improvement in competitiveness through wage moderation. This is something you do once. The second is a boom enjoyed by Germany’s traditional export customers, such as Russia and the Middle East.
While I am generally optimistic about the western world’s economy in the long run, and relatively pessimistic in the short term, my views on Germany are the reverse. I think Germany will withstand the US slowdown much better than during previous cyclical downturns. There will be no recession – not even close. But what then? Looking beyond this economic cycle, I am not sure Germany is heading in the right direction. Take energy policy. Despite the high oil price and global warming, Germany remains committed to phasing out most of its nuclear power during the next decade. The 2009 federal election is probably the last chance to reverse the policy.
Nor is there any appetite to liberalise an incumbent-friendly corporate governance system. The banking sector remains woefully unconsolidated. The government has even tried to intimidate the European Commission into not challenging the latest version of the Volkswagen law, which protects the company against hostile takeovers. Germany also remains deeply hostile to full liberalisation of the EU service sector.
The country is in the middle of a secular shift to the left. I do not mean this in purely psephological way. The Christian Democrats of Chancellor Angela Merkel and their Bavarian sister party will probably remain the strongest group in parliament at the next election. The shift is taking place within parties – and across the centre-left spectrum. The “locusts” affair of a few years ago, when a senior Social Democrat denounced private equity in those terms, symbolised the anti-capitalist mood. The Social Democrats are proposing tax increases for high earners and there is even talk of imposing a de facto maximum wage of €1m ($1.55m, £785,000) a year.
The most visible evidence of the shift is the emergence of the Left party, the post-Communists, as the third largest political force. Its rise brings havoc to coalition arithmetic. On present polling data, the only parties that could form a two-party coalition are the SPD and the Christian Democrats – what we have now. But grand coalitions are never truly grand. This leaves three-party coalitions as alternatives. There are three realistic possibilities. One is a coalition of the left: Social Democrats, Greens and the post-Communists. I would consider this combination the least desirable but the most likely.
Another would be Christian Democrats, Free Democrats and Greens. But I doubt whether this will happen in 2009. The Greens and Christian Democrats are too far apart, politically and culturally. Even if such a tie-up came about, not much could be expected on economic reform. It would still mean a phasing out of nuclear energy – a price the Greens would extract.
In the short run, the most likely alternatives are a repeat of the grand coalition – bringing another four years of gridlock – or a coalition of the left, which would mean four years of anti-reform. I see no constellation that would produce sensible economic policies in the long run.
So Germany, from a position of relative strength, is moving in the wrong direction. France, by contrast, is moving from a much weaker position but it is heading the
correct way.
© The Financial Times Limited 2008