Finance: Research, Policy and Anecdotes

The German elections this Sunday are a game changer, not only because they will mark the end point of the Merkel era. As pointed out by many observers, this is the first time in modern German history that there is no incumbent chancellor running for re-election (all previous seven chancellors either (were) stepped down in between elections or lost re-election. A second novel feature is that the campaign started out with three serious candidates for chancellors (before the Green candidate tumbled). Hand in hand with this, there has been a trend away from the two-camp structure that has dominated campaigns (though less so governments) since the early 1980s – SPD-Greens on the one hand and CDU/CSU-FDP on the other hand, with two ‘Volksparteien’ (big tent parties) as anchors on either side. There has been an increasing Dutchification of German party politics, with no party getting more than 30% of the votes, a number of mid-sized parties and a number of smaller parties.  This has resulted in more flexibility in government formation – so far only on the state-level, but now also at the federal level. There was already an attempt after the last election to form a government between CDU/CSU, FDP and Green party, which ultimately failed, but this time it is almost certain that there will be a coalition of three parties, with at least four different possible combinations.  However, this also means that government formation will take much longer (to retake the example of the Netherlands: elections took place in March and there is still no new government in place).

But what are the challenges that the new government will face?  Many of these coincide with challenges on the European level.  This brings me to a podcast conversation that I had with Thomas Losse-Mueller earlier this year (in German!).  This conversation was a broad tour d’horizon on topics I have thought and written about over the past decade, but several of these are directly relevant for the current political discussion in Germany and for the next German government:  First, there has been a rediscovery of the role of the government both in aggregate demand policies and as insurer of last resort, as we have clearly seen during the current pandemic. Second, this applies beyond the national level to the European level, especially the euro area level. The pandemic has opened the door towards a fiscal union, first on the expenditure side, but in future also on the revenue side. There has been also a change in the German position, both among politicians and economists, with the realisation that the privilege of Germany as anchor country of the euro area (thus reaping a euro dividend) also implies certain responsibilities. Ultimately, the European economy can only recover if all countries recover with a similar trajectory, given their close economic integration.  Third, it is critical that the heavy lifting is not left exclusively to the ECB as during the eurodebt crisis, where expansive monetary policy was offset by tightening fiscal policy in many core countries, including Germany.

One final comment on the hysterical inflation fears that are being raised during the current election campaign (minor ironic note: globally, hyperinflation is typically defined as inflation of more than 50% per month, in Germany apparently as above 2% per year). There is a narrative that Hitler’s rise to power in 1933 was driven by the hyperinflation in 1923 – you do not really have to be an economist or historian to see fallacy in this argument – Hitler’s electoral success started during the Great Depression and high unemployment it brought with it, while Germany suffered from deflation rather than inflation!

P.S.: there is one comment I made in this podcast where I certainly have changed my mind – vaccines: while the European “vaccine-union” might not have been successful initially and much slower than in the US and the UK, looking at the rollout from the current viewpoint, I think it has been a huge success, especially considering the counterfactual of purely national approaches.

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