As Angela Merkel begins new term, compromises could undo economic boom

The German economy could hardly be in better shape as Angela Merkel formally begins her fourth term as chancellor Wednesday. Unemployment is almost nonexistent, stock prices are at record highs, and there is almost no inflation.

But the political compromise that allowed Ms. Merkel to remain in power could bring that boom to an end. She had to bend to demands from her party’s junior coalition partner, and agree to roll back deregulation that, since 2005, has unleashed the country’s economy.

Now, with Europe’s economy gaining momentum after a prolonged slump, Germany — the Continent’s economic powerhouse and de facto leader — risks heading in the opposite direction.

Ms. Merkel, who will take the oath of office Wednesday along with her cabinet, faces the same political quandary afflicting many industrialized nations, including the United States. Life should feel great, but to many people, it doesn’t. Their wages haven’t budged, their jobs seem less secure, and they believe the good times have passed them by.

In Germany, where unemployment is only 3.6 percent, many angry voters in last year’s election deserted the two centrist parties, Ms. Merkel’s Christian Democrats and the left-leaning Social Democrats, in favor of minority parties, especially the far right Alternative for Germany. “People are less confident,” said Stefan Sachs, a leader of a local chapter of the IG Metall union in the state of Hessen. “From one day to the next, you can be fired.”

To get reluctant Social Democrats to sign up for a coalition government, Ms. Merkel made concessions that critics say would take Germany back to a time when the country looked more like France, with rules that protected workers from dismissal, provided a broad safety net — and squashed entrepreneurship and growth. The power-sharing agreement gives the Social Democrats more influence over policy than in their previous coalition, which ruled until elections last year.

In particular, Ms. Merkel ceded the Finance Ministry and control of the purse strings to the left-of-center party, which is likely to relax the strict fiscal discipline that prevailed under Wolfgang Schäuble. Mr. Schäuble, the finance minister from 2009 until he resigned last year, was a dominant figure not only in Germany but throughout Europe, where he enforced the austerity imposed on crisis countries like Greece and Portugal in return for eurozone aid. Austerity measures in the wake of the financial crisis largely involved shrinking government spending, by trimming pensions and cutting social programs, as a way to rein in budget deficits.

He also pushed those countries to emulate Germany’s reforms, in particular relaxing restrictions on hiring and firing. Many countries complied, at least to a degree, helping joblessness in the eurozone fall to 8.6 percent in February, down from more than 12 percent in 2013. Yet now, some critics believe Berlin is on the verge of refusing its own medicine. Without Germany serving as an example, leaders in other eurozone countries would have even more trouble negotiating the politically hazardous terrain of reform.

“The coalition is undoing all the reforms that turned Germany from the sick man of Europe into the locomotive,” said Holger Schmieding, chief economist of Berenberg, a German bank. Mr. Schmieding predicted that Germany’s relative decline would pave the way for France to take over as the eurozone’s driving force.

France is roughly where Germany was at the beginning of the 2000s, and Emmanuel Macron, the French president, has begun his own, albeit fitful, reform drive. Although the two countries appear to have divergent narratives, Germany remains by far the eurozone’s biggest economy, and Mr. Macron will need Ms. Merkel to fulfill his regional priorities, like overhauling the European Union’s creaky machinery.

Indeed, the increased power of the Social Democrats — who have advocated greater investment spending and are resolutely pro-European — could serve to support Mr. Macron, even if Germany backtracks on economic reforms, according to Hans Stark, a professor at the Sorbonne University who studies Franco-German relations. “It is in Germany’s interest for Mr. Macron to succeed with his reform plans,” Mr. Stark said.

Domestically, the promises exacted by the Social Democrats during difficult negotiations with Ms. Merkel would make it easier for workers at small firms to organize, allow greater increases in pensions and put limits on companies’ use of temporary workers.
Source: The New York Times