Few Alternatives for Germany
Europe heaved a sigh of relief with Angela Merkel’s reelection as German chancellor. She has been a key support during the eurozone’s fiscal-financial problems, and all of Europe knows how important Berlin’s support will remain going forward. Of course, Merkel has yet to settle on the specifics of her coalition government. On Wednesday the Green Party announced that it will end unprecedented talks with the Christian Democrats and not serve as a coalition partner.
Now a Grand Coalition with the Social Democrats looms. If the German media are right, a lot of compromise will go into that effort. But even with all the prospective political give and take, Europe can count on future German support. Economic and financial imperatives will compel it. Even if the vote had gone less well than it did, the country simply is too tied to the euro and the union to turn away. Berlin may negotiate its best deal, but it knows that if it were to let the common currency fail, even in part, it would do itself great economic and financial harm. The latest economic reports in Germany suggests that growth is already slowing.
The vulnerability of German banking alone should be enough to evoke support from even Berlin’s most antieuro politicians. Even the eurosceptic Alternative Party for Germany, which did not make the 5 percent hurdle for entry into the federal parliament, has not outright declared that Germany should exit the euro.
Here’s why: Dissolution of the eurozone, the expulsion of some current members, and the unavoidable defaults such events would produce would consequently threaten Germany with such severe credit constraint that the economy would tip into a deep recession. The only way Berlin could avoid such an outcome would be to support the banks directly. There are, then, only three options: recession, direct support for the banks, or support for the periphery. Politically and financially, it is easier to marshal Europe to pursue the third option than to face the others.
German industry has almost as much at stake in the survival of the euro and the eurozone. To be sure, German business went into the currency union with great skepticism. But since then it has learned to love the euro. To see why, all one need do is consider what German industry would face in the absence of the common currency. Money is pouring into Germany. It is, after all, the only viable large economy on the continent. A separate Deutschemark would by now have risen into the stratosphere. German business would have lost any pricing edge on global markets. Its exports would have suffered horribly. But because the eurozone encompasses weaker economies, it has not risen as high as a German deutschmark surely would have. The common currency has effectively saved German producers, and they know it. No doubt business leaders frequently brief Berlin on this economic fact of life.
These concerns lie at the root of Berlin’s austerity demands, its resistance to zone-wide debt issues, and its seeming intransigence on banking regulation. It is these matters that will form debating points as Merkel builds her new coalition, not whether Germany will provide the support.
Politics can always lurch, of course, and the tone from Berlin will depend on exactly how Merkel forms her new coalition. But whatever tone, spin and rhetoric emerges, the economic and financial reality will remain inescapable and will secure German support almost regardless the inevitable political posturing or the conditions Berlin places on specific arrangements. No one in leadership can or will ignore the underlying economic and financial reality, even the most ideological, and Chancellor Merkel is far from an ideologue. In her own quiet way, she may even be a visionary.
Milton Ezrati is senior economist and market strategist for Lord, Abbett & Co. and an affiliate of the Center for the Study of Human Capital and Economic Growth at the State University of New York at Buffalo. He writes frequently on economics and finance. His new book, Thirty Tomorrows, linking globalization to aging demographics, is forthcoming from Thomas Donne Books of Saint Martin’s Press.
Image: Flickr/Rock Cohen. CC BY-SA 2.0.