Germany’s Mixed Signals
Last week’s media headlines focused on how the election results in France and Greece reflected a wave of rising public resistance across Europe to the austerity programs being championed by Germany, the IMF, and the EU. Less notice has been given to Germany’s internal revolt against Chancellor Angela Merkel’s conservative policies at home and abroad. Elections in the north German state of Schleswig-Holstein just ended the dominance there of Angela Merkel’s Christian Democrats (CDP/CDU) while emboldening the center-left Social Democrats (SDP), hard-left Greens, and libertarian Free Democrats (FDP). Those results are expected to be repeated at this Sunday’s ballot in North Rhine-Westphalia, Germany’s largest state.
Taken together, these elections send a message to the Chancellor that support for her assistance-for-austerity program is eroding. Instead, Germans are increasingly choosing more radical positions. Those in favor of austerity are losing patience with subsidizing Greek largesse, while a larger majority is tiring of austerity altogether. There is talk that this polarization may eventually lead to an unprecedented “Traffic Light Coalition” of the SDP (“the reds”), FDP (“the yellows”), and Greens at the federal level. This coalition would likely offer a policy program in direct opposition to the current Government, with great implications for the eurozone.
Chancellor Merkel’s Government has walked the fine line of tending to traditional post-war German sentiments of fiscal and monetary prudence and trying to hold together the currency bloc dominated by Germany. This dual mandate manifested itself in massive assistance for Greece, Ireland, and Portugal in return for harsh austerity measures. The Chancellor’s supporters see this as a moderate and prudent compromise – but as is the case with such arrangements, all partisans are left with grievances.
The German left – represented by the conventional SDP and the radical Greens – largely supports the subsidies being sent to the eurozone’s weaker members but also questions why belts must be kept so tight at home. In their utopian Marxist vision, all Europeans should be living a life of plenty and no one should truly be asked to work for it.
The German right – represented by Merkel’s conventional CDP and the radical FDP – was initially interested first and foremost in preventing a shock to the market caused by the failure of one of the PIIGS (Portugal, Ireland, Italy, Greece, or Spain). However, as these peripheral nations have rebelled against the austerity requirements accompanying the assistance Germany has offered, many of the more market-minded members of the right have begun to see the euro as a lost cause and a drag on Germany’s own economy.
If this trend continues, the next federal election could see the current Merkel coalition lose out to the Traffic Light Coalition of the left-wing parties and the radical-right Free Democrats. The resulting policy agenda could include both increased public expenditure at home to placate the left wing and a withdrawal from the eurozone at the behest of the radical right. As with the current policy, this will be a mixed blessing for global investors.
A German withdrawal from the eurozone would utterly undermine the world’s second reserve currency. The ECB absent of German influence would be pressured by the likes of France and the PIIGS to devalue the euro expeditiously. This would have dramatic implications for world trade and for the international monetary system. It may even forestall the further decline of the dollar as investors run away from the euro and into the relative stability of the US for a time.
However, for Germany, I believe it would be a decidedly winning move. Even with less fiscal prudence under the dominant left-wing parties, inflation hawks would likely retain their historic control of the Deutsche Bundesbank, which would resume issue of the trusty Deutsche Mark. While the SDP/Greens’ public-sector expansion might precipitate a crisis far in the future, Germany currently has the domestic surpluses and industrial capacity to underwrite their foolishness.
If Germany decides that its economic system is fundamentally incompatible with a neo-Keynesian Europe, it may shift its trade focus to emerging BRICS countries, some OPEC members, and even resource-rich Western nations like Australia and Canada. I believe that such an economic bloc would favor a gold-based international monetary system, which may actually lead to the ultimate demise of the fiat money system advocated by Washington and Brussels.
In summary, beneath much media noise about the backlash against austerity in bankrupt nations, it is actually once again the German electorate that may hold the fate of Europe in its hands. Let us all hope they choose the course of least devastation and watch carefully to position our investments for any outcome.
John Browne is Senior Market Strategist at Euro Pacific Capital.
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