Germany‘s new coalition: What will change?

 

The strength in the result of the FDP has caused anxious warnings within the CDU, against radical policy change. While the two parties have more agreement on the most important policy issues, compared with any other two parliamentary parties in the country, the CDU is concerned about the radicalism about some of the FDP’s ideas – abolition of the federal employment agency, abolition of work protection rules, cut in the top income tax to 35% amongst many – that they fear the CDU would be bulldozed into the same position as it was during 2005 election, when Merkel ran on a radical reform agenda, and almost lost the election. The media are predictably focusing on those differences. See for example Heike Goebel’s pessimistic assessment in Frankfurter Allgemeine..

There is much speculation in all the newspapers about a possible share-out of jobs, but it is yet to early to pin anything down, as the coalition talks have not even formally started. Westerwelle will get the foreign portfolio, and one FDP politicians will get either finance or economics, but this is yet wide open.

FTD Deutschland did a straw poll among chief economists of banks, who mostly warned the new government against fast tax cuts. A notable exception included Hans Werner Sinn, who also said it would be a big mistake to start the consolidation period prematurely.

In a commentary in Financial Times Deutschland, Wolfgang Munchau is among the few who is relatively optimistic about a joint centre-right agenda. It won’t be the FDP’s programme that will emerge from the coalition talks, but it will be markedly different from what a Grand Coalition would have done, especially in areas such as tax policies, corporatism, relations with Russia, and employment rules. The fact that the coalition also has a majority in the Bundesrat, at least until May next year, means that they can actually do some of the reforms. He says this coalition has a likely shelf life of one parliamentary term, at the end of which a united left front will reemerge, and pose a formidable challenge.

In another commentary, Thomas Fricke takes a look at the economic competence of the FDP and finds it wanting. It is the party which has done least to try to comprehend the crisis, and treating it as though it was caused by German employment rules, or difficult tax forms. The FDP always made the mistake to overemphasis structural reforms, and to ignore cyclical dynamics. The change in government comes at a critical time when the recovery has only just begun.

 

SPD in Meltdown

While there were no real developments in terms of the new coalition – the coalition talks will last until early November – much of the attention was yesterday focused on the SPD, whose party chairman Franz Muntefering yesterday signaled that he would step down. It is not clear yet whether Frank Walter Steinmeier would take over as party leader, after his disastrous election result. There is much of opposition within the SPD to Steinmeier, which favours an opening to the Left Party, something that Steinmeier has categorically ruled out. The commentary about the SPD was devasting. Muntefering and Steinmeier have been accused of running the party like dictators, quelling any discussion. Some have criticised Steinmeier’s immediate power grab, when he announced yesterday that he would lead the SPD’s parliamentary faction in the Bundestag, which would make leader of the opposition. (alongside Oskar Lafontaine of the Left party, who is a much more gifted orator)

 

Trichet concerned about lending

Il sole 24 ore leads with Jean-Claude Trichet’s statement in front of the European Parliament that the expansion of both money and credit continued to decelerate, and that corporate loans would be in retreat, a situation likely to persist for several weeks to come. He said for that reason, the ECB’s governing council will not raise the level of interest rates. He said despite some signs of stabilisation, it was premature to think in terms of exit strategies at this moment in time.

 

Spain also in meltdown

El Pais leads its economic sections with analysis on the different forecasts for the economy next year, which are all significantly more pessimistic than the government’s own. The average of the non-official forecasts is for a fall  in GDP by 0.6%. One of the forecasters is saying that the country was facing a quadruple crisis, of finance, of construction, of fiscal policy, and of competitiveness.  Others are saying that Spain is at least now becoming more competitive with exports growing at a faster rate than the EU average.

 

Credit indicators back to normal

Calculated Risk has posted another version of its very useful credit indicators, several measures to determine the health of the credit, which all show that the situation is improving. In most case we are not only back to the pre-Lehman levels, but even to the pre-crisis levels. (This is the result of the extraordinary liquidity injections by central banks, which has been paying off with a considerable delay.)

 

The Irish will love to hear this

This is probably not very helpful for the Irish Yes campaign on the Lisbon Treaty, though they look fairly secure according to the latest polls. The French European minister Pierre Lellouche said yesterday the Lisbon Treaty would be enforced, no matter how the Irish. This is a world of almost 9bn soon, and we need to get on with the big issues of our time – environmental, energy, immigration – and the 500m Europeans are not going to be stopped by 3 or 4m Irishmen. Jean Quatremer has the story.

 

Jean Pisani Ferry on the long-term effects of the crisis

Jean Pisani-Ferry is really pessimistic about the long-term implication of the cirisis. He writes in Le Monde that the effects are widely underestimated. He said that after a crisis of such magnitude, a permanent fall in GDP by 5% is normal, while this is not much for fast growing emerging countries, it means two or three years of lost output growth for mature economies. He said there is a marked difference of views between Europeans, who are heavily influenced by their own experiences during the 1970s, and the Americans who believe that the crisis will have no long-term effect on unemployment.  For the Europeans the best way out of their pessimism would be a determined action plan, on labour markets, education, financial reforms, and budgetary reforms to raise the growth potential of our economies.

 

IMF conditions on Ukraine, Latvia, Hungary too harsh

Austria’s Der Standard has an interesting report about a critical CEPR report on the IMF’s packages for the Ukraine, Latvia and Hungary, which the report criticised as unnecessarily harsh. The programmes were intended to save the solvency of the state, but in the process ruined the economies, and in the case of the Ukraine actively contributed to the country’s political destabilisation. Der Standard also talked to Austrian experts, who agreed that the conditions, especially on the Ukraine, were disproportionately tough.

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