German Euroskepticism: The Euro’s Next Big Challenge

GERMANYAs the euro crisis is in its fifth year, one of the worst nightmares for many in Europe may yet come true. The founding congress of the Alternative for Germany (AfD) two weeks ago marks the emergence of a party that wants to exit the euro and challenges Germany’s pro-European political consensus. This has had instant reverberations as Germany heads for national elections. More worrying, however, this is the strongest signal yet that support for Europe and its ailing currency among Germans may be wearing thin. (Joerg Forbrig – German Marshall Fund – 25/04/2013)

Few would have thought this movement had legs when in July of last year, 172 economists signed an open letter to protest what they considered to be German government’s misguided policy of “socializing debt” in the eurozone. Within months, these professors were joined by disgruntled members of the governing Christian and the Free Democrats, defining the emerging movement’s clear anti-euro stance and declaring its political ambitions. AfD scored its first success when voters in a key regional election in January dealt a defeat to Merkel and catapulted protest initiative into the limelight. In the weeks since, the regional branches have sprung up across the country, membership in the party has soared to 7,500, polls suggest potential support from up to a quarter of all Germans. In most EU countries, similar euroskeptic formations emerged soon after the crisis began. While Germany had seemed immune to this kind of populism, the AfD has shattered that illusion. As is true elsewhere in Europe, its program is a crude mix of general demands ranging from an end to political correctness and more direct democracy to simpler tax regime and stricter immigration laws. It openly flirts with the fringes of German politics to the right and left, but is also aiming to recruit from the strong social and political center where disappointment with the political establishment, feelings of social injustice, and unease with government’s handling of the euro crisis have all been gaining ground. This emergence of the AfD changes the playing field ahead of September’s elections for the Bundestag, Germany’s legislature. Until now, the governing coalition of conservatives and the liberals were neck and neck with the opposition Social Democrats and Greens. Pundits considered it likely that considerable popularity of the chancellor, combined with the inept campaign of her challenger, would tip the balance in favor of the current government. According to most observers, the arrival of AfD will be primarily at the expense of the governing coalition and could even spell the end of Merkel’s chancellorship.

However, polls indicate that among the parties’ own voters, 15% of Social Democrats and 27% of Greens can imagine voting for an anti-euro party such as the AfD. This means that across party lines, and among Germans at large, there exists residual reticence about the euro, whose protracted crisis has only nurtured the nostalgia for the Deutschemark. AfD will therefore be a force to be reckoned with by all of the established parties, and will affect the coalitions they might form in the wake of the election and European policies they propose as part of their campaigns. The political shakeup that the AfD would represent must not be underestimated. German governments, whatever their color, must not allow the AfD to derail the committed, if oft-criticized, pro-European course of the country. They must, however, become a lot better in explaining to the public the benefits of a strong Europe, and especially how the euro is crucial for the economic development and wellbeing of Germany, its largest economy. For their part, German voters, whichever their affiliation, should think twice about rewarding the AfD at the ballots for what amounts to slogans. They should take pride in the fact that for decades, political rabble-rousers have not stood a chance in Germany, which is one of the most stable and predictable democracies in Europe. Decision-makers and publics elsewhere in EU will have to consider more carefully how their conduct and criticism of Germany is perceived by the Germans. Through renewed efforts at reform and by shunning the use Nazi clichés, leaders in other EU states can help pull the rug out from under AfD. But absent a concerted and determined effort by Germans and all Europeans to refute AfD’s populism and consign it to political no-man’s land, the crisis in Europe may just have taken another turn for the worse. 


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17 Responses to German Euroskepticism: The Euro’s Next Big Challenge

  1. No company symbolizes German industrial might like Daimler, the giant maker of Mercedes-Benz autos and trucks. So when the company said this week that it, too, had finally been caught in the downdraft of the European economic crisis, it was an ominous sign for all of the Continent, if not the whole world. German exporters like Daimler have been bastions of stability on a continent burdened with shaky banks, dysfunctional governments and legions of unemployed youth — not to mention the worst auto industry slump in two decades. But Daimler’s glum forecast for 2013 was the latest evidence that Germany, and other relatively healthy countries like Austria and Finland, risk falling into the recession that has long afflicted their southern neighbors. The slowdown in Germany was foreshadowed by months of declining industrial output, said Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y. “The E.U. has made Europe a much more cohesive economy, which is good when things are going up,” he said. “But when things are going down the multiplier is very strong. An outgoing tide lowers all ships.” The region’s overall economic weakness as well as slowing demand in China and other big markets for German exports of consumer products, cars and sophisticated machine tools, industrial robots and construction equipment are finally taking their toll.

    Just one more consecutive quarter of shrinking economic output and Germany would officially enter a recession. The same is true of Belgium, France, Luxembourg, Austria, even Sweden and Finland. The Netherlands has already suffered two quarters of declining gross domestic product.

    Further evidence of the spreading European recession came Thursday, first from Madrid, where the Spanish government reported that unemployment had reached a record level: 27.2 percent. Then new economic data from London indicated that Britain had barely avoided slipping back into recession for the third time since 2008. “The reality is that Europe still faces severe vulnerabilities that — if unaddressed — could degenerate into a stagnation scenario,” David Lipton, first deputy managing director of the International Monetary Fund, said in London on Thursday (…..)

  2. Unemployment has surpassed Great Depression-era levels in Southern Europe. Recession is drifting to the once resilient economies of the north. Even some onetime hawks on government spending say they cannot cut any more. After years of insisting that the primary cure for Europe’s malaise is to slash spending, the champions of austerity, most notably Chancellor Angela Merkel of Germany, find themselves under intensified pressure to back off unpopular remedies and find some way to restore faltering growth to the world’s largest economic bloc (…..)

    Like Ms. Merkel, the European Union shuns the word “austerity,” which has been banished from the official lexicon in favor of the technocratic euphemism “fiscal consolidation.” At a summit meeting in Brussels in February, the union’s 27 leaders, who met just out of earshot of thousands protesting austerity, responded to public fury by endorsing “differentiated, growth-friendly fiscal consolidation,” code for flexible policies tailored to each country rather than doctrinaire, one-size-fits-all debt and other targets.

    The linguistic adjustment, while doing little to calm protesters, has since translated into real steps to relieve economies straitjacketed by budget cuts. Portugal and Ireland, for example, were this month given seven more years to repay bailout loans. Spain, France and the Netherlands are meanwhile likely to get a green light from Brussels in coming weeks to miss what are supposed to be mandatory budget deficit targets. The rule bending does not go down well with countries that have played by the book, like tiny Estonia, which, along with its Baltic neighbor Latvia, is feted by fans of austerity as proof that harsh medicine works. “If you signed up for something, why start yelling that the rules are unfair?” asked President Toomas Hendrik Ilves of Estonia, which, after a catastrophic slump, now has one of Europe’s few economies with robust growth. In much of Europe, austerity has become a byword for misery and has helped stir a fierce backlash against the so-called European project, a venture that began in 1951 to bind the Continent’s previously warring states into a zone of harmony and, it was hoped, prosperity. Public confidence in the European Union has slumped to record lows, according to survey data compiled by Eurobarometer, the union’s polling arm, and leaked this week by a research group, the European Council on Foreign Relations. Seventy-two percent of those polled in Spain said they “tended not to trust” the group, compared with 23 percent in 2007, the year before Europe got swept up in a global financial crisis. Distrust has also soared in Germany, rising to 59 percent from 36 percent. “At a time when so many Europeans are faced with unemployment, uncertainty and growing inequality, a sort of ‘European fatigue’ has set in,” Mr. Barroso, the commission president and a former Portuguese prime minister, acknowledged recently. Politicians on the left who have long campaigned against austerity worry that the softer tone on spending cuts adopted by Mr. Barroso and others will bring only policy tweaks on the margins. “Are we just fiddling while Rome burns?” asked Udo Bullmann, a German Socialist. “Europe is burning,” he told Mr. Rehn in Parliament on Thursday. Pervenche Berès, Socialist chairwoman of the Employment and Social Affairs Committee, is skeptical that signs of greater flexibility will result in a dramatic change of policy. “They still want to kill Keynes,” she said, referring to the British economist John Maynard Keynes, who believed that fiscal stimulus, not contraction, is sometimes the best solution to crisis. “They always make minimal changes at the very last minute when they have no choice,” she added.

  3. Josh Hill:

    In other words, austerity was a disaster — as both Keynesian economics and historical experience told us it would be — so now, rather than fixing their mistakes, they’re trying austerity light. What, exactly, is wrong with them? Ideology? Ignorance? Stupidity? All three?

  4. Professor Uziel Nogueira says: Austerity — economic policy used to reduce budget deficits — is the new villain in the US- EU political lexicon today. However, the euro zone case is quite different from the US, though. The US has a perfect monetary and fiscal union. The eurozone is an imperfect monetary union without a fiscal union. Mario Draghi-ECB are not empowered to bail out governments or the financial system while Ben Bernanke-FED are. Mariano Rajoy is obviously not happy with the social-political impact of budget cuts. After all, politicians are elected to spend taxpayers money and not to save them. Rajoy has no alternative but continue with budget deficit reduction policies. Otherwise, the costs of rolling Spanish debt will rise to unsustainable levels as it did last year.

    Budget deficit reduction is approached from two distinctive power positions in the eurozone and US. In the former, financial markets are in charge and not the central bank. In the latter, the FED is still in control. Ben Bernanke can print any amount of money to bailout government and banks. This is only possible because the US dollar is the world currency. The dollar dominant position allows the FED to control interest rates paid by federal debt. In the 17 eurozone member countries, the ECB plays a limited role in government and banking bailouts. Global financial markets — primary lenders to governments and banks — are the main actors in determining how deficits are financed and the interest rates to be paid.

  5. Jennifer Stewart: The euphemism is hypocrisy at its best. Politicians who blindly support austerity despite clear evidence that it never works and then attempt to jargon their way out of accountability are just as irresponsible as politicians who mismanage money or allow mismanagement to occur. And anybody who is in favor of austerity has not experienced it. There are human beings who haven’t, either, who have broad enough minds that they can see and understand that austerity demoralizes, that people who are pushed into rank suffering shut down or rebel. It’s a survival mechanism. But Angela Merkel and her breed don’t belong in that category. I’m absolutely sure that if she was subjected to exactly the same experience as any number of people who have been forced into such poverty that they can’t keep their children, she wouldn’t take it lying down.

    Politicians without humanity are cruel control freaks, but they’re also stupid. They understand nothing about human nature and they don’t realize that people who are crushed may fold for a while, but pretty soon they rise up. And strip the politicians of their power. These people remind me of ultra conservative Republicans in Congress.

  6. seeing with open eyes: Bravo, Jennifer! Now, wouldn’t it be great if here in our country we could pass a law, no a constitutioal aendment that requires politicians to live the results of every piece of legislation – no loop holes no exceptions. They seem to be doing this already by the override of the sequester tto refund air traffic controllere – guess who flies a lot????? Some more suggestions: -Senators over 65 having raises calculated by chained index cpi; -School aid cuts applied to the kids of congressman first. Readers, feel free to add your own suggestion for this.

  7. niobium: Jennifer, you are incorrect. Germany’s economy in the early oughts (2000-2003) struggled immensely. They restructured, used austerity measures and now their economy is stronger than any other economy in the Western world. Germany doesn’t print money like we do here to lower our interest rates yet Germany’s 10 year bond yield is lower than here in the US. When Germany was having thier economic malaise other regions of Europe did not aid Germany in their restructuring quest and felt no pity. So, it is quite understandable that Germany does not feel sympathy for the southern stricken European economies. Germany feels they should do the same as Germany did in the early oughts.

  8. OldEngineer: You say that austerity “never works”, ignoring its success in the Baltic region. We in the USA have seen five years of deep deficit spending yield no growth, no income for pension funds, no employment for graduating students, and no end to the Federal hunger for more taxes to further grow itself at the expense of the private economy which sustains all government.

  9. Joseph:

    Mounting evidence in Spain, Greece, France and England, among others, illustrates that the “rising up” phenomenon is already happening. When the mere hope of a better tomorrow is a distant or forgotten possibility, the danger of revolt heightens. There is still time to put that human face on government policies across Europe that address upside-down balance sheets and debt. If such an approach is not broadly adopted and quickly, the hand that no longer feeds will be eviscerated.

  10. Steve: Angela Merkel represents a country that has been fiscally responsible, and a populace that works harder, longer, and more efficiently than others in Southern Europe. Their hard won savings has been confiscated over the last few years to be redistributed to those who work less hard, less long, and less efficiently than them, so that those in Southern Europe can continue enjoying the fruits of an unsustainable social support system, bloated govt. sector, and retirement at an age when many pro-athletes are signing 7-year contracts.. How would you feel if you were her “breed.”

  11. Len Charlap: OldEngineer says, “We in the USA have seen five years of deep deficit spending yield no growth…” I don’t know exactly what years you are talking about, but if you go to…, you can see from the graph we had 26.6% GDP growth (compounded) from the last quarter of 2009 when the poisonous Bush policies were abating to the first quarter of 2012. In fact since the end of the effects of Bush policies we have not have a quarter with no growth. Would you please post a list of the bridges and buildings you have designed so I can avoid them?

  12. Professor Uziel Nogueira says: Austerity refers to economic policies aimed at curbing public budget deficits getting out of control. Despite emotional outburst against it by NYT readers, economic reality does not correspond to the actual outrage expressed.

    To begin with, the US society never experienced economic austerity and REAL budget cuts like other countries in the world, including Europe.

    US constituencies expect elected politicians to spend taxpayers money and not to save them. Otherwise, why to elect them in the first place? to impose austerity and make people suffer? to end the American dream? Besides, expectation of increasing public spending is not irrational. It is supported by a dominant position of the dollar as THE world currency.

    The FED is the only central bank in the world that can print any amount of money without danger of being punished by financial markets.

    The anti-austerity group can rest and sleep well. As long as the dollar continues to be the world currency, no austerity economic policies will ever be implemented. There is no economic and financial reasons for it.

  13. Facts revealed in recent months, including in these columns, suggest that a substantial change in macroeconomic policy settings is required to save many economies from further man-made disasters: The IMF analysis (Blanchard and Leigh, 2013) showing multipliers have been underestimated; The De Grauwe and Ji analysis (2013) showing high levels of austerity increase public debt and cause slower growth/recession/depression; The latest analysis questioning the conventional interpretation of the Rogoff and Reinhart causality, and suggesting that slower growth/recessions/depression could increase public debt rather than the reverse; The increased widespread questioning of the further quantitative easing undertaken in the United States and, in particular, in Japan.

    Fiscal austerity in Europe, and quantitative easing, are on an unprecedented scale. There will be substantial adverse consequences of these actions for the global economy (…..)

    If the facts and the economic logic are correct in identifying austerity and further quantitative easing as unsound policies, what are the monetary and fiscal policies that are relevant to today’s crisis? In many affected countries there are two fundamental macroeconomic problems: deficient aggregate demand and excessive public debt. The objective of macroeconomic policy should be to raise aggregate demand without increasing public debt or creating excessive inflation. This can be achieved if the new money creation is not used (as at present) to finance banks, speculators and investors, but is instead directed to provide increased financial resources to public infrastructure, households and to the unemployed and disadvantaged so that they can increase domestic demand.

    This is the policy that Bernanke recommended to Japan in 2002 (Remarks before The National Economists Club). That policy is even more relevant today (see R. Wood, How to Solve the European Economic Crisis: Challenging Orthodoxy and Creating New Policy Paradigms, Amazon Books, published 19 December 2012) given the high levels of public debt which are set to go higher as a consequence of the forecast higher-than-expected budget deficits.

    Rather than monetary and fiscal policy being determined in separate silos, the coordinated monetary/fiscal policy combination of new monetary creation to finance public spending is certain to raise consumer spending without increasing public debt. This policy combination is the most powerful fiscal and monetary policy combination that is available to address current excessive debt and inadequate demand difficulties. If liquidity becomes excessive under this policy at some future point in time when resources ultimately become fully utilised then the increased money supply can be sterilised. The sole purpose of the new money creation is to create the first round of stimulus: beyond that point the multiplier/accelerator process can be relied upon spread the recovery process throughout the economy provided there is sufficient liquidity. The above policy recommendation is valid whether countries stay within the Eurozone or not. If the Eurozone is disbanded these policies will still remain necessary to create a safe economic recovery.

  14. SOUTHERN EUROPE’S economic depression deepens. In Spain, 6.2 million people — a record 27 percent of the labor force — can’t find a job. Greece’s unemployment rate is even higher, 27.2 percent; in Italy, it’s 11.6 percent. For young people, the jobless rates are double or, in the case of Italy, triplethat. Clearly, economic growth is urgently needed, lest a generation of Europeans be forced either to emigrate or to waste their prime earning years — to say nothing of a prolonged slump’s implications for democracy and political stability. Yet in a recent visit to Washington, German Finance Minister Wolfgang Schaeuble, whose government pretty much calls the shots in Europe, defended the current policy — which he described as “force member states, oblige member states, to stick to European rules, to reduce deficits in a, of course, balanced way, to enhance their competitiveness by structural reforms,” until “European mechanisms” buy enough time for them to regain access to financial markets. Mr. Schaeuble added, in words that must chill the heart of every young job-seeker from Bilbao to the Balkans, “No one should expect that Europe will deliver high growth rates in the coming years.” This is a recipe for trouble. No doubt Mr. Schaeuble meant to state a grim fact, not to celebrate it. And his government is right to insist that Europe’s less competitive economies reform their tax codes, labor markets and regulations in exchange for (mostly) German financial support. But with such unemployment, it’s counterproductive to press for dramatic deficit reduction in the short run. This is especially true given that Germany and other wealthy Northern European economies are themselves cutting deficits, which tends to curtail their demand for goods — including products from the south. Mr. Schaeuble argued, “If you promise to deliver immediately growth, you will only create the next bubble. That’s what we are decided not to do. Therefore, we need time.” Easy for him to say: Germany’s unemployment rate is only a fifth that of Spain. It is achieving this by outcompeting its European neighbors for export markets. Germany’s trade surplus in 2012 was more than 6 percent of its gross domestic product — a far higher ratio than that of any other major economy, including Asian export powerhouses like China. In short, Europe’s predicament is not simply due to Mediterranean profligacy. It results from a profound imbalance between uncompetitive Italy, Spain and Greece on the one hand and hypercompetitive Germany on the other — within a currency union that denies the less competitive the traditional remedy of devaluation. Both sides need to change. Germany has taken some steps to boost real wages and consumer demand recently; its unit-labor costs have actually risen at the same rate as Italy’s over the past five years. But it needs to do much more; no matter how much Southern Europe restructures, it can’t maximize job creation if Germany, the largest neighboring market, doesn’t buy its products.

    Exports to the United States certainly helped Latin America escape its debt crisis in the 1980s.

    As U.S. Treasury Secretary Jack Lewsaid in Berlin this month: “Policies that would help to encourage consumer demand, in countries that would have the capacity, would be helpful.” This was sound advice, which Mr. Schaeuble would be wise to reconsider. (source: EDITORIAL BOARD – The Washington Post – 28/04/2013)

  15. JMJackson: Why doesn’t Germany build a Mercedes plant in Greece, a Siemens development center in Portugal and VW retool its Spanish Seat operations into more Audi and VW production? They have the money and Southern Europe has the labor. This is what unified economic regions do: spread the productive capability around rather than competing and scolding one another for moral failings.

  16. Professor Uziel Nogueira says: Because German entrepreneurs are smart where to invest their money. China became a favorite destination for German manufacturing investment in the last two decades. Besides, Germany is the only G-7 country not complaining about Chinese competition all the time.


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