What does Germany's Grand Coalition Agreement mean for Europe ?

Wednesday last week, after over two months of exploration and negotiation, chancellor Merkel’s CDU, CSU, and the leaders of Germany's social democratic party finally signed, sealed, and delivered their Grand Coalition Agreement entitled “Shaping Germany’s Future”. The 185-page oeuvre contains eight chapters on topics ranging from growth, innovation, and well-being (chapter 1), to full employment, good work, and social security (chapter 2), solid government finances (chapter 3), equal opportunities (chapter 4), governance in a modern state (chapter 5), Europe (chapter 6), international relations (chapter 7), and the coordination and cooperation among the coalition parties (chapter 8).

A thorough analysis of the relatively short chapter on Europe confirms my expectation of September 2012: "Both [coalition] combinations [either Merkel’s CDU and the conservative wing of the SPD or Merkel’s CDU and the conservative wing of the Greens] would mean a continuation of the current austerity policies for Europe, albeit with a stronger focus on investments and growth.” 

…And so it is written on page 157: “For Europe to find a lasting path out of the crisis, a comprehensive approach is needed which combines structural competitiveness reforms and sustainable fiscal consolidation with investments for future growth and employment in a socially balanced manner.”

This does not sound like a well thought-out strategy but a highly manufactured statement, as if both parties wanted to pack into one sentence everything their respective voters care about: fiscal consolidation and structural competitiveness reforms for CDU voters; social balance and investments for growth and employment for the voters of the social democrats, whereby the insert “in a socially balanced manner” sounds like an afterthought…easily forgotten as soon as the going gets rough. See also my post of June this year: "Less Austerity in return for more 'Competitiveness' Reforms - a Pyrrhic victory for Europeans".

And, please, could someone explain to me how demand-lowering fiscal consolidation and wage-lowering competitiveness reforms can be combined with growth- and employment-generating investments, not to speak of in a socially balanced manner ? Which rational investor would risk her money in a country where the people have little or no money to spend on the products or services she offers ? The experience in Greece, Spain, and Portugal clearly shows that fiscal consolidation (i.e. austerity) combined with structural ‘reforms’ (i.e. cuts in wages and non-wage social security contributions combined with wage-compressing 'flexibilization' of labor markets) increase unemployment and poverty, shrink the economy and lead to DEFLATION, rather than investments, employment and growth. And when the economy shrinks, public debt ratios rise !

It is futile to repeat ad nauseam that the high public debt ratios need to be scaled back by continued fiscal consolidation (as at the bottom of page 158 of the coalition agreement) when these public debt ratios are raised, not lowered, by the austerity policies applied in the euro zone in the past four years and again recommended in the coalition agreement. And it is hypocrite to write that the linkage between private bank debt and public debt needs to be broken (see top of page 158) when this very link was created by the taxpayer-financed bank bail-outs designed by the same CDU officials who now serve as authors of this coalition agreement. 

Instead of demanding that private banks will be held liable for their own risky investments in the future, why not make them pay now ? So far, euro zone countries have recovered only between 15% (Germany, Ireland) and 40% (Spain) of the taxpayer-financed support extended to the financial sector (see table 7 of the IMF Fiscal Monitor, October 2013, table 7 on page 16). Instead of demanding the entire bail-out payments back from EU banks, the citizens (read: small taxpayers) of euro zone countries are punished with strict conditionality for fiscal consolidation (read: the shrinking of the public sector and the dismantling of the welfare system) and structural reforms (read: liberalization of labor markets and wage compression) in return for financial assistance from the EU (see top of page 159). Crazy !

But that is not all ! Merkel's new Grand Coalition is about to fire off the next stage of her rocket toward a leaner, meaner Europe: as stipulated on page 159 of the coalition agreement, each euro zone country is to sign a legally binding and enforceable reform agreement with benchmarks for competitiveness reforms, solid finances, growth, and employment in return for investment funds from the European Investment Bank, the EU budget, and EU structural funds. This is nothing else than a lever to dictate economic policies in the entire euro zone, vulgo: blackmail !

All in all, the short chapter on Europe contains the same old employer- and investor-friendly, supply-side non-sense that got us into the mess we’re in, enriched with placebos like ‘social balance’, ‘solidarity’; the ‘protection of consumers, the environment, and employees’; the ‘fight against youth unemployment, wage and social dumping’; ‘investments for the future’, etc. etc. but without the funds to realize those lofty goals. Hence, based on my analysis of just one short chapter of the coalition agreement, I come away with the impression that it lacks credibility and sincerety, not to speak of a well thought-out strategy to end the euro crisis. 

If I were a member of the social democrats, I would NOT vote for this agreement.