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November 19, 2019

Not the time to bet against the Franco-German relationship

There is no place on earth where the Franco-German relationship is less understood than in London. The UK is not, and never has been, an arbiter of diverging Franco-German interests. Brexit will not change it in one direction or the other. And you will always find French and German officials who can’t stand each other. What has pulled the two countries together since the 1950s are joint interests. 

Commentators have declared the relationship dead time and again because they have not seen it in action. There are long periods during which it was dormant - for example during the era of Willy Brand and Georges Pompidou, the early period of Jacques Chirac, and now the late period of Angela Merkel. It has a punctuated history.

If the grand coalition - and Merkel - are replaced in 2021, or earlier, there is a chance of a reconnection in that relationship. This would be on the basis of more German investments to meet climate targets and defence spending commitments. We recently noted convergence on defence spending in comments by Emmanuel Macron and Annegret Kramp-Karrenbauer. France and Germany have traditionally different perspectives on Nato, but the future of Nato is not decided by either country. The US will determine the extent to which Nato is effective. The fact that AKK and Macron used different adjectives to describe NATO is also immaterial. What matters more is that they both want to strengthen European defence, and that AKK is ready to invest political capital in this process. 

Germany has partially softened its opposition to EU-wide deposit insurance. We also note that there is a debate in full swing on the German debt brake - see our separate story below. There is a long way to go until Germany accepts the institutional changes necessary for the eurozone to succeed in the long run. We make no predictions, but would caution against another premature dismissal of the Franco-German relationship.

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November 19, 2019

German employers and union united against the debt brake

We have characterised the German debt brake as the worst economic decision any G7 country has undertaken in our lifetimes. It is the reason why during the 2011-2013 period the eurozone adopted synchronised austerity, which almost led to its collapse. It drove up massive imbalances within the eurozone, and between the eurozone and the rest of the world. But Germany itself is the biggest victim of that policy. It has resulted in large and structural under-investment. And that is now becoming probably the biggest single driver for political change in the country. 

Yesterday we noted the emergence of an unprecedented coalition: among employers and trade unions against a government that includes the SPD. The two social partners have issued a joint study by their aligned economic institutes to show that the country is short nearly half a trillion euros' worth of investment. What is extraordinary apart from the large number are the authors of that report. For the IW institute to ask for more government spending is a big deal, and a sign of shifting positions within German society. 

Business leaders were among the biggest fanboys of the debt brake until they realised that the lack of infrastructure investment is hitting them most of all. The two institutes came up with a list of €457bn the German government needs to invest in the following categories. We took the following summary from Adam Tooze (@Adam_Tooze): 

  • 75bn decarbonization
  • 20bn 5G
  • 60bn rail
  • 20bn autobahn
  • 15bn housing  
  • 59bn school & university
  • 50bn early childhood
  • 158bn local government

One argument made by Michael Hüther of the IW is that the low rates of interest present a unique opportunity for a debt-financed investment programme. The response by Olaf Scholz is that the government was doing precisely that - citing figures of a €550bn investment programme over the next few years. But these headline numbers belie a reality of much lower investments in practice, with allocated funds not used up. We don’t believe the argument of the finance ministry that there are capacity constraints in the German economy - if only because it is up to them to solve the problem by giving incentives to companies from all over the EU to bid for lucrative Germaan contracts.

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