Don’t hold your breath for the press conference at the European Central Bank (ECB) in Frankfurt, Germany. Expect no proverbial “market-moving news” simply because there are no economic developments that would warrant a departure from an easy credit stance.
The euro zone is experiencing a core rate of inflation between 0.9 percent and 1.2 percent. The unemployment rate in more than half of the monetary union is still stuck in a range of 9.4 percent (France) and 20.6 percent (Greece), with more than 115 million people — 23.4 percent of the population — at risk of poverty and social exclusion.
Apart from that, the monetary stance has to offset the fiscal policy’s restrictive bias, because the euro zone is struggling to reduce its huge public debt (89.1 percent of GDP), and most member countries are far from official commitments to balance their public sector accounts.
It is also well to remember that a central bank is not supposed to restrict the money supply under conditions of excess demand for its currency.
The ECB should probably exercise a bit of pedagogy in explaining its policy markers. Anybody reading the confused European financial commentaries can see that there is a clear need for that.
For me, reading about that confusion has definitely taken a back seat to an unexpected fun of reading the German press again. Gone are the ponderous and nitpicking pontifications. The shock of Germany’s Italian-style imbroglio has brought cover stories of the sort: “Losers Fighting for Power,” with the picture of the caretaker Chancellor Angela Merkel and her hapless Socialist opponent Martin Schultz leaning, exhausted, against the ring ropes.
That improbable pair connected again yesterday (Wednesday, Dec. 13) without any tangible result in officially dubbed “open-ended exploratory coalition talks.” That’s the show I am watching. The ECB’s show will be much less exciting because the European central bankers have done a good job of conducting stable and predictable monetary policies.
The German political drama is a special event. Beyond the usual suspense of power grabs, it is also revealing societal changes in a country most people take as a paragon of rectitude and stability.
I often wonder what those true believers think of this: Merkel led her party, called the Union (Christian Democrats and Bavarian Social Democrats), last September to its worst election result since 1949. Similarly, the Social Democratic Party (SPD), led by Schultz, had its worst election showing in the post-WWII history. And there is worse: Since last elections in 2013, the Union and SPD lost, respectively, 8 percent and 5 percent of their voters.
In spite of that, as the screaming cover story claimed, these “losers” still want to lead their parties, and the country, based on election programs rejected by 46.6 percent of German voters.
In the political culture of Western democracies, one would expect Merkel and Schultz to resign in the wake of such calamitous election results.
Perhaps more interesting is the fact that there has been no grass-root attempt in either party to force their leaders out. The worst I have seen in the German media was a polite call to Merkel to “please switch” (umschalten, bitte), when there are clear and precise German terms to say please resign.
At any rate, Merkel is not resigning, she wants no minority government, and neither party is eager to fight new elections.
Schultz has been reconfirmed as the party leader by an 81.9 percent vote of 600 delegates to an SPD congress last week, after withdrawing the original decision to remain in opposition. He now wants to talk about power sharing with Merkel, starting off with proposals to introduce a minimum wage, boost spending on social welfare and infrastructure programs and, going well beyond the French list of EU reforms, he wants the “United States of Europe.”
Most of SPD opening positions are non-starters, and qualified as such by Merkel and her lieutenants.
It all seems like the SPD is going into negotiations with offers the Union cannot accept. Talks, then, are bound to fail. But, in that case, the SPD would not be attacked for refusing to cooperate in providing a stable government for Germany.
There is also the possibility that the SPD leadership could be induced to rescue Merkel by accepting another grand coalition. Unless voted down by the SPD’s rank and file, such a move would spell the end to Germany’s oldest political party – a similar path to oblivion currently experienced by the French Socialists.
This incredible rigmarole is in stark contrast to the statesmanship displayed by Christian Lindner, a young leader of the center-right Free Democratic Party (FDP). He broke off exploratory talks after it became clear to him that there was an utter lack of trust among potential coalition partners, in addition to seemingly irreconcilable party platforms. Lindner is no longer a media darling, but I am hearing that his party’s membership continues to grow.
Lindner is a man to watch. He is, quite possibly, the Macron of Germany.
Interestingly, the French President Emmanuel Macron seems to be playing a subtle game in German coalition talks. Under the guise of trying to offer a way out to his beleaguered “friend” Merkel, he is reported to have worked hard to persuade Schultz to participate in the new government. The idea here is that Schultz would overcome Merkel’s refusal of Eurozone’s deep structural reforms forcefully advocated by France.
By all appearances, Macron’s Florentine flair looks like it might be working. Schultz, a former President of the European Parliament and a keen observer of the French penchant for big ideas, has made Europe the centerpiece of his negotiating program.
Macron’s efforts, however, could come to naught because another “Duke of Milan” (Machiavelli used to work for Milan’s Duke Francesco Sforza) will be showing a stunning political comeback next March — and he is leading a group of euro-skeptics dead-set against French-German shenanigans. Italy’s former Prime Minister Silvio Berlusconi, rejuvenated by a health treatment in Merano’s Alpine spa resorts, will likely command 40 percent of popular vote in next March elections with a three-party alliance of FI (Forza Italia), FdI (Fratelli d’Italia) and LN (Lega Nord).
The euro is a well-managed currency. Over the last twelve months, the euro’s trade-weighted value increased 4.6 percent (in contrast to dollar’s 5 percent decline) and served as a powerful instrument of price stability in a highly open euro area economy, where the external sector accounts for about 70 percent of GDP.
The European currency will not be negatively affected by Germany’s political turmoil. The German monetary policy is in the hands of ECB, and Berlin’s discretionary fiscal measures will be frozen until there is an effective governing coalition with stable parliamentary majority.
When will that happen is anybody’s guess. In my view, a coalition around the Union and SPD under Merkel’s leadership is a long shot. If Merkel steps down, the way might be open for some sort of Union-SPD government. Otherwise, new elections will be inevitable, although it is not clear that the outcome would produce a substantially different configuration of potential coalition partners.
Meanwhile, the euro zone investors might wish to focus on a supportive ECB policy, the monetary union’s increasingly sound fiscal management, strengthening growth dynamics and a remarkable price stability.
Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.
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Germany’s in the middle of a deep political crisis, but it won't affect the euro