A PR Coup Prior to the EU Summit

How does one take the wind out of the sails of the tax-and-spenders at an upcoming EU summit? Simple, announce that you are cutting spending. Germany has just done just that, shortly after criticizing France for letting up on the 'fiscal pact' targets.

“Germany has ignored calls from its euro zone partners for more economic stimulus by tabling plans to cut spending and bal


ance its budget ahead of schedule on the eve of an EU summit dedicated to growth.

Wolfgang Schauble, German finance minister, said on Wednesday that his budget for 2014, involving spending cuts of more than 5 billion euro to trim the total below 300 billion euro, was "a strong signal for Europe". The plan means Germany will reach budget balance in 2015, a year earlier than required under the "debt brake" written into its constitution.

He described the 2014 spending plan as "growth-friendly consolidation", intended to prove to the rest of the euro zone that "consistent sustainable budgeting and growth are not mutually exclusive". Philipp Rosler, economy minister, said Germany's public finances were the "envy of the world".

Publication of the budget was deliberately brought forward by a week to bring out the figures


before the EU summit, according to German officials. In spite of tough cuts for health, social security and environment, the plan was rushed through the cabinet well ahead of schedule.

It could scarcely have come at a more sensitive moment, with other members of the euro zone, led by France and Italy, looking for relaxation of the tough budget guidelines laid down in the stability and growth pact that underpins the euro.

Francois Hollande, the French president, whose socialist government is set to miss its 2013 budget deficit target by a significant margin, would insist that the EU summit adopted a stance that showed the EU was not just a "Europe of austerity" with a uniformly rigid budget policy, said an official in Paris.

European leaders must "define an economic strategy for budget adjustment that is balanced and intelligent, differentiated to meet the situation of different states", he added. France wants the emphasis of euro zone budget discipline to be on reducing structural – rather than nominal –

deficits, excluding the short-term effects of economic slowdown.”


(emphasis added)

Of course, 'reducing structural rather than nominal deficits' means 'let's just keep spending our heads off'. The Germans have interpreted this correctly and are trying to head such plans off at the pass. Evidently they have realized that they must practice what they are preaching. And while finance minister Schäuble refused to be drawn into commenting on France's fiscal policies, his coalition partners in Germany were a great deal less diplomatic:

“The announcement of the Socialist president of France that he would take on more debt than allowed must not lead to a breach of the fiscal pact," the Free Democrats' parliamentary group chief, Rainer Bruederle, told a party convention.

"At the very least, we should not encourage France on this," he said. "We must take heed because the fiscal pact breakers are out and about once more."

France's Socialist government admitted last month that it would fail to bring its budget deficit below an EU ceiling of 3 percent of economic output this year as it had previously hoped. Finance Minister Pierre Moscovici said France would ask its EU partners and the European Commission for an extra year to reach the 3 percent deficit goal.

Bruederle also urged the ECB against kicking off a new round of sovereign bond buying in response to last month's inconclusive Italian election that has unsettled financial markets. "I am certain the ECB knows it cannot be the repair service for wrong election results," he said.

Bruederle, who has been chosen to head the pro-business FDP's campaign for Germany's September federal election, also echoed comments from party chairman Philipp Roesler warning against efforts to talk down the euro.

There is not a currency war yet, Bruederle said, but a deliberate policy of pursuing cheap money would only lead once again to bubbles. "We want a strong euro," he told delegates.”


(emphasis added)

Mr. Bruederle is of course 100% correct, both with his assessment about the 'pact breakers' being out and about, as well as his assessment that easy money will only lead to new bubbles. In fact, it seems likely that a bubble has been set in motion in Germany as a result of the ECB's ultra-low administered interest rates. Bubble conditions are simply busy moving from the periphery to the core. How much longer will it take for politicians in the EU to finally realize what the cause for the boom-bust cycle actually is? We are watching and waiting, but we are not holding our breath. Mr. Bruederle is one of the lone voices in the wilderness, and even he apparently doesn't realize the danger the German economy faces already due to the ECB's loose monetary policy.


Addendum: Backtracking Socialists

It appears Germany's socialists have finally 'gotten over' their reformist past under former chancellor Gerhard Schröder. Readers may recall that Schröder's welfare and labor market reforms are today credited for the excellent performance of Germany's economy and the increase in its competitiveness (unfortunately, there are already signs that Germany is backtracking greatly on these fronts). Today's version of the German socialist party no longer wants to support this reform agenda, as it is held to have cost it a great many votes in spite of its later success:

“When it comes to the euro crisis, the source of German smugness is not difficult to pinpoint. In 2003, just as economies were beginning to heat up in many of those countries now suffering mightily from brutal austerity packages, Chancellor Gerhard Schröder presented a painful list of welfare cuts and labor market reforms known collectively as Agenda 2010.


But the reforms, which Schröder first presented on March 14, 2003, almost destroyed the Social Democrats. And now, with the general election just six months away, the party is once again having trouble striking a balance between taking credit for an economic success story and distancing itself from Schröder-era welfare cuts that many say have gutted solidarity in the country and exacerbated the abyss between German haves and have-nots.

This week, SPD head Sigmar Gabriel provided an impressive demonstration of the rhetorical tightrope walk his party's ambivalent position on Agenda 2010 requires. "We can be very proud of Agenda 2010. … Though controversial, it was the correct decision," Gabriel told SPIEGEL ONLINE in a weekend interview. At the same time, his party on Sunday agreed on a platform that positions it far to the left of the Agenda reforms, with many planks designed specifically to distance itself from Schröder's legacy.


But the SPD has largely retreated from its erstwhile role as driver of the reform bandwagon — even as leading German economists are calling this week for policymakers to double down and push for an "Agenda 2020."


With the Social Democrats having moved to the left recently, any such reforms are not likely to come from the center-left party and its chancellor candidate Peer Steinbrück. Indeed, despite Gabriel's insistence that Agenda 2010 is no longer a significant source of friction in the party, Schröder's visit to the SPD fraction in German parliament on Tuesday was notable in that it marked his first appearance before Social Democratic lawmakers since Nov. 21, 2005, just days before he lost the Chancellery to Angela Merkel. Officially, he was there to mark the 10-year anniversary of Germany's refusal to join the US in the Iraq invasion, but Agenda 2010 is the primary reason for his extended estrangement from his party.


Many of the disgruntled leftists joined the far-left Left Party, which has siphoned off significant numbers of votes from the SPD in both state and national elections since then. Whereas the SPD had become accustomed to receiving well over 35 percent of the vote in general elections from the 1960s through the 1990s, it has been rough going recently. The 2005 election, when the party received 34.2 percent, was the SPD's second-worst result since the late 1950s. Then, in 2009, they received a paltry 23 percent, its worst-ever result since World War II. Currently, the party stands at 24 percent in the polls.”


(emphasis added)

In other words, getting back the misguided voters that have drifted over to the far left is not going to be achieved by convincing them of the merits of the reforms, but by dropping the reform agenda. Getting votes is regarded as more important by the socialists than the economic future of their country. We hasten to add that they are not different from most other political parties in that respect,  but one would think that the example of Schröder's success could be milked in better ways than by simply denouncing his program. It is yet another example of how time preferences of politicians in democracies tend to be way too high.




Former German chancellor Gerhard Schröder: his decidedly non-socialist reforms are today credited with having raised Germany's competitiveness and produced its economic success. He actually did consider the long term consequences of his policies, a rarity in democratic regimes.

(Photo via berlinertageblatt.net)




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One Response to “Germany – Trying to Defy the Deficit Spenders”

  • No6:

    Germany really needs to get the other Euro countries in line.
    It also needs to reduce time preference of its leadership possibly by getting rid of elections altogether.
    A fire in the Reichstag might be a good place to start.

    But seriously, can the Euro have any future without stronger German governance?

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