By Daniel Schäfer in Frankfurt
Published: January 18 2011 22:29 | Last updated: January 18 2011 22:29
Shining example: workers inspect a photovoltaic panel at Yingli Green Energy, one of the Chinese makers to end Germany’s leadership in solar technology
Q-Cells of Germany was the world market leader in solar panels when Anton Milner, chief executive, was asked about the threat of competition from Asia. His response was dismissive. German customers would never buy a Chinese product that had to last 20 years, he maintained.
A few years on, China’s Suntech Power has outsmarted and outsold the German company, and Mr Milner is no longer in office. Q-Cells’ stock market value has collapsed from €11bn at the end of 2007 to about €390m. Besides Suntech, Chinese rivals such as Yingli Green Energy and JA Solar are also flooding Germany with cheap but reliable panels, while large parts of the domestic industry are in the doldrums.
Q-Cells provides a cautionary tale for corporate Germany. Just as the country’s machine tool makers, car companies and electrical engineering groups have brought their plants back to full speed following the sharp economic decline of 2009, the next big challenge appears on the horizon.
China – long renowned for producing cheap clothes, toys and electrical goods – overtook Germany to become the world’s largest exporter in 2009. Last year it registered a trade surplus with Germany of almost €17bn. Today, it is on the verge of a direct assault on Europe’s economic powerhouse in its core industrial areas.
CALLED TO A COUNT
Germany’s rapid rise in the 19th century has made Otto von Bismarck the subject of intense interest in China. Scholars have sought to understand how Germany was able to industrialise so quickly and the diplomatic balancing act that this required.
More recently, popular writers have also focused on the role Bismarck’s Germany played in the growth of the western financial system. As China becomes more assertive, some speculate that Beijing is shunning some of the Bismarckian balancing that has been a hallmark of its rise. One European analyst says China is going through “a Prussian moment”.
..
“I am expecting a massive attack from China in Europe in the next few years – particularly in the machinery sector,” says Franz Fehrenbach, chief executive of Bosch, the world’s largest maker of car parts and Germany’s largest privately held industrial group by sales. “The Chinese will improve their quality and technology, but they will at the same time be extremely price-attractive.”
In areas that include not only solar panels but also wind energy, telecommunications networks, power transmission and high-speed trains, Chinese companies are already on a par with their western counterparts, often after “re-innovating” technology sucked out of joint ventures. In other areas, such as construction machinery, machine tools, cars and electrical engineering, companies from Sany in construction equipment to Shanghai Electric in power systems are gearing up to compete.
As the race between the world’s largest exporting nations gathers pace, what steps is German industry taking to fend off the greatest threat it has faced since the rise of corporate Japan in the 1960s and 1970s?
At first glance, it looks as though Europe’s largest economy has lost out in its core sector. In mechanical engineering – a sector employing 909,000, or one in 20 German industrial workers, and made up mostly of small and medium-sized “Mittelstand” enterprises – China has taken the lead. At 25 per cent, its world market share in 2009 was almost twice that of Germany.
“I have to say I find it admirable with how much speed they are catching up, and how clever they are in combining western technology with their own and producing it at low cost levels,” says Peter Leibinger, deputy head and part-owner of Trumpf, the world’s largest laser-cutting machine maker.
INTELLECTUAL PROPERTY PERILS
Hide and seek games counter ‘absorb and digest’
In the cat-and-mouse game between hungry Chinese companies and technology-rich western corporations, both sides have developed increasingly sophisticated methods.
As part of China’s strategy to move up the technology ladder, the country’s intelligence agencies are actively involved in industrial espionage and the appropriation of trade secrets from multinationals, say intelligence officials in western countries.
German and other western intelligence agencies regularly issue warnings to executives travelling to China, advising them not to carry computers or mobile phones containing sensitive information. German executives based in China say the warnings are now an annual event and companies have introduced numerous precautions to protect their most sensitive technology.
For example, in 2005 when Chinese engineers were working with companies such as Siemens, Alstom and Bombardier to “absorb and digest” western high-speed rail technology, the suppliers played all sorts of “hide and seek” games, according to Chinese media. In one account from Chinese technicians, the foreign technology provider tried to convince them that rubber carriage joints on one train design were to stop passengers from falling off platforms. The Chinese engineers eventually worked out that the joints were actually to prevent train carriages from rolling sideways.
Other countries, notably Russia, are suspected of industrial espionage. But the concern over intellectual property infringement in China has been a perennial issue ever since economic reforms began three decades ago.
China-based European executives say German industry associations have previously advised German companies not to file any patents in China at all. “Their advice was based on the assumption that the moment you open up and describe your technology to the patent office, your idea is already gone,” says one.
The executives say some companies that feel compelled to register patents in China have tried to protect their sensitive technology by deliberately including mistakes in the blueprints provided to regulatory authorities.
In spite of assurances from Beijing that the government is working to improve IP protection, international groups still complain about weak enforcement and arbitrary legal rulings. Meanwhile, Chinese companies are becoming more aggressive in protecting their interests. In 2009, France’s Schneider Electric agreed to pay a Chinese company $23m to settle a patent lawsuit. Schneider had begun legal proceedings first, accusing the same company of stealing its electrical switch technology. Jamil Anderlini
..Like Heidelberger’s presses, German engine-maker Tognum’s products for ships, trains, and the oil and gas industry are regarded as premium. When KiwiRail, a New Zealand train operator, became the first developed country company to order Chinese locomotives, it insisted that the engines were supplied by Tognum. “The Chinese don’t have service and maintenance networks outside their home country, so this is where we come in,” a Tognum executive says.
Until now, their success has been driven by consumers in their vast home market and exports to fellow emerging markets. However Thomas Lindner, president of VDMA, the German engineering association, says the competition will soon be felt in Europe. “In higher-volume markets, such as machine tools, the situation will become a lot more critical for us than in the niche markets,” he says.
While this poses a threat to some, many executives are adamant that their companies will hold their own. The key is the characteristic that has driven their economy for more than a century: the engineering-based approach and inventive spirit that spawned Mittelstand specialists in niche markets and premium technology products, from Porsche sports cars to Trumpf cutting machines.
. . .
Take Heidelberger Druckmaschinen, world market leader in printing presses. It recently produced its 1,000th press at a site near Shanghai, where it is assembling standard machines of similar quality to those sold in Europe but with fewer features and priced more competitively.
Bernhard Schreier, chief executive, says the group is even winning market share in China from local rivals who are unable – and unwilling – to catch up. “This is a niche market with low volume and high entry barriers,” he says. With its huge research and development costs, he adds, it would neither yield the profits nor confer the prestige of a move into strategic areas such as solar power, cars or high-speed trains.
But local production, and pursuit of the Chinese market, have downsides – such as the practice of re-innovation. “What China lacks right now is not money; it is technology. So if you can give technology to China this is the best way to capture this market,” says Mao Zhenhua, director of the institute of economic research at Beijing’s Renmin University.
Germany is not only Europe’s largest trading partner with China, it is also its largest technology exporter. But managers are increasingly outspoken about forced technology transfers, as well as pressure to use local suppliers and provide state-controlled design institutes with detailed information on projects. Martin Brudermüller, head of the Asia-Pacific region at BASF, the world’s largest chemicals maker by sales, says the group always takes its best technology to China. But he adds that “compulsory technology transfer is something we are strongly lobbying against”.
While some German companies avoid taking cutting-edge technology with them when they move production to Asia, others simply avoid disclosing it in full to Chinese partners. “It takes two to tango,” says Axel Heitmann, chief executive of Lanxess, the speciality chemicals maker. “We have defined key technologies which we are protecting by not lifting the lid on them.”
. . .
Long-standing relations with China have proved valuable for Germans. Bosch, for example, has been doing business there for more than 100 years, and today employs almost 30,000 people at 46 sites. This history has created high levels of trust between the conglomerate and local partners.
Plus, Bosch’s managers say, if you can sell your products there, you can sell them anywhere. “The biggest market in China is going to emerge in the midprice segment. Our task is to become steadily more competitive and to play a large role in this segment locally. If we achieve this, then we don’t have to be afraid about the competitiveness in the rest of the world,” says the company’s Mr Fehrenbach.
Indeed Siemens, Europe’s largest engineering company, has developed a strategy to sell lower-priced, simplified versions of its high-end products pitched at the Chinese market elsewhere. The Somatom Spirit, its entry-level CT scanner, was developed and produced in China; today more than 80 per cent are sold abroad – increasingly in the west.
While large operations such as Siemens and Bosch have long run big research and development centres in China, some of the smaller Mittelstand companies cannot afford even to produce there. Mr Fehrenbach says companies that are not exposed to the tough rivalry in China’s midprice segment will struggle to compete with the Chinese in western markets as well. He suggests smaller companies set up joint ventures or other forms of partnership in China.
Some fear that failure to confront the problem one way or another will eventually put small operators out of business. “German companies are in danger of being pushed ever higher on to the technological ladder, until one day the market niche will be too small to survive,” says Jürgen Heraeus, chairman of the eponymous precious metal trading group.
As China goes on the offensive, the threat grows more acute. Its companies are already considering the establishment of plants and research and development centres in Europe, poaching German engineers and trying to snap up Mittelstand companies and coveted brands. “We will start with sales and marketing next year and we plan to go into all major European markets,” says Daniel He, Sany’s European head. Sany is setting up a plant for concrete pumps and an R&D centre close to Cologne, for which it hired engineers from the nearby Toyota Formula 1 race team that recently shut up shop.
The number of investments in Germany by China, which last year overtook the Netherlands as the largest importer to Germany, shot up from seven in 2007 to 45 in 2009, according to Germany Trade and Invest, a government business promotion group.
Some investors start with small projects that help to them understand local culture. Fosun, China’s biggest private conglomerate by sales, invested about €10m in restaurants and tea houses two years ago. Today the steel, pharmaceuticals, property, financial and tourism group plans to spend $2bn on Mittelstand technology companies. “Fosun will be one of the Chinese pioneers in investing in Europe,” Guo Guangchang, chairman, recently told the Financial Times.
His words presage how the battle between the world’s largest export nations will play out. Chinese companies will transfer, buy and develop technology and brands, and enter western markets. German industrialists will try to outsmart them by maintaining their technological edge and expanding in China and other emerging markets.
With Chinese companies competing on both price and technology, “Siemens and other western industrial companies will lose market share in the years to come”, says James Stettler, capital goods analyst at Italy’s Unicredit.
At Bosch, Mr Fehrenbach says: “The only valid conclusion for us is to do even more to remain at the technological forefront. Our main task is to stay ahead.”
Copyright The Financial Times Limited 2011. Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others.
..
Tuesday, January 18, 2011
Thursday, November 11, 2010
Merkel: The true believer
By Lionel Barber, Quentin Peel and Gerrit Wiesmann in Berlin
Published: November 8 2010 20:55 | Last updated: November 8 2010 20:55
This week’s summit of the Group of 20 leading economies in Seoul may be shaping up to be ill tempered, but Angela Merkel seems to be positively looking forward to it.
The German chancellor is not entirely sanguine. She is worried about the revival of trade protectionism, not least in the US Congress, and the looming threat of currency competition turning into a new trade war.
But as she takes charge of pouring tea and coffee for visitors to her office in Berlin, Ms Merkel spells out how she hopes to be a peace-maker in Seoul if any confrontation develops between the US and China about exchange rates and trade imbalances. “I do not think it sensible to have a political argument,” she tells the Financial Times.
Unlike some leaders, Ms Merkel – re-elected last year for a second term as leader of Europe’s biggest economy – says she is a true believer in the value of the G20 grouping. She defends its success since 2008 in preventing the global economic crisis turning into a prolonged depression, and wants to see the disparate group of industrialised and emerging economies put on a more permanent basis.
Where some would argue that the group is too large to be decisive, the chancellor’s advisers say she likes the size, with the number of leaders round the table about the same as a European Union summit in Brussels.
A trip to Seoul gives Ms Merkel a chance, at least briefly, to put the problems of a fractious and unpopular coalition government in Berlin to one side. A high-profile performance on the world stage might help restore her flagging poll ratings at home.
Reviving global growth and defending free trade should also make it easier to handle the financial crisis within the eurozone, where the cost of government borrowing has soared for the weaker economies in the EU’s common currency area. The threat to the cohesion of European economic and monetary union has been the chancellor’s overwhelming concern since the outbreak of the debt crisis in Greece at the start of the year.
But top of her list of priorities for Seoul is to combat any new protectionism and try once more to revive the flagging Doha round of trade liberalisation and development talks within the World Trade Organisation.
As for the problem of global imbalances, pitting the huge trade surpluses of China and Germany against the deep deficit of the US, she is bluntly dismissive of Washington’s proposal that the G20 should set quantified targets to even them up. “Exchange rates should reflect the real economic strength of a country,” she says. “Particularly in view of the debate about China, we need to find facts and benchmarks to calculate what is a fair exchange rate. I don’t think much of quantified balance of payments targets.”
Global imbalances are not just influenced by exchange rates but are also a function of competitiveness, she argues. “The competitiveness of countries depends on many more issues than just weighing up imports against exports.” Simply setting a 4 per cent target for surpluses and deficits as a proportion of gross domestic product is “far too narrowly focused”. It is a more diplomatic way of dismissing a suggestion that senior German government officials reject as “rubbish” with “no scientific or academic basis”.
Part of the concern in Berlin about the US-led debate on global imbalances is that it shoves Germany into the same corner as China, ignoring the fact that Germany cannot manipulate its currency, the euro. “You cannot look at the European Union, with its single internal market, and a common currency in large parts of it, on a country-by-country basis,” the chancellor says. “One should judge Europe as a whole.”
In spite of her confident words, however, Ms Merkel is having to defend her policies, and her country, on several fronts.
Germany is under attack not only from the US for the size of its trade surplus – a matter of great pride to most German manufacturers and economists, let alone politicians. The same trade surplus is criticised within the EU, not least by France, ordinarily Berlin’s closest political ally. Meanwhile, Ms Merkel’s policy of sternly reducing public sector borrowing and outstanding debt, even while global economic recovery remains tentative, is under fire on both sides of the Atlantic.
The chancellor is unrepentant. She dismisses fears of any double-dip recession or prolonged 1930s-style downturn as exaggerated. “As far as Germany is concerned, I do not have that fear,” she says, “and if I think of the forecasts of the International Monetary Fund, I do not fear for the world economy either.”
One cause of the crisis “was that we did not have sustainable growth. In many countries growth was built on debt and [speculative] bubbles. In contrast, I now see the world in some regions returning to a sensible growth path. The greatest danger that threatens us is protectionism, and we are still not taking enough steps to ensure genuinely free trade”.
Ms Merkel defends the achievements of the G20 so far, arguing that the group has made notable progress in terms of global financial regulation and on the most substantial reform ever negotiated for the IMF. The Basel III agreement tightening rules on bank capital Ms Merkel depicts as “a splendid thing”, negotiated in less than two years, in contrast to the previous and less ambitious Basel II deal that took more than 10 years to finalise. “If that is now put into effect everywhere, we will have created a genuine crisis prevention mechanism,” she adds.
As for the IMF, “we have achieved the most comprehensive restructuring ever” in the run-up to the summit. “The new IMF structure reflects the power relationships in today’s world much better than before.” If the heads of government had not been breathing down their necks, the G20 finance ministers would not have been forced to reach agreement, she says.
The main gap on the regulatory map, she admits, is the lack of a deal on how to regulate banks that are considered “too big too fail”. Views were split within the Basel-based Financial Stability Board and “that remains an important task for 2011”.
The other item on the chancellor’s G20 agenda is to discuss exit strategies from the massive government spending policies pursued by the leading economies – including Germany – to prevent the global recession turning into a depression. Wolfgang Schäuble, the sharp-tongued finance minister who will accompany Ms Merkel to Seoul, left no doubt about his dismay at the US Federal Reserve’s latest decision to pump $600bn into the American economy in a new round of quantitative easing. He described US policy as “clueless”.
Ms Merkel is more measured. “The G20 has repeatedly stressed that the crisis can only be overcome if we dismantle all forms of obstruction and do not erect new ones,” she says with a disarming smile.
The two most powerful figures in the German government do not always see eye to eye on policy. Mr Schäuble was Ms Merkel’s predecessor as leader of the centre-right Christian Democratic Union and sees himself as the standard-bearer for Germany’s traditionally strong commitment to the EU and to the euro. Yet on the questions of strict control of debt and deficits in all member states of the eurozone, to ensure the stability of the common currency, they are twin defenders of budget discipline.
They are joint architects of Germany’s own tough spending curbs, to cut €80bn ($111bn) over the next four years. Both are also behind a determined German push for tougher sanctions to prevent eurozone members breaking the rules embodied in its stability and growth pact – and for changes in the EU treaty to create a “permanent crisis resolution” mechanism to prevent a sovereign default.
She defends Germany’s insistence on drastic austerity measures in the weakest eurozone economies – Greece, Ireland, Portugal and Spain – as essential for currency stability and future sustainable growth. “I do not see any contradiction between growth and stability,” she says. “We have already seen the allergic reaction in the markets to countries that combined excessive debts with inadequate competitiveness.”
Sanctions agreed by EU leaders late last month will focus on competitiveness benchmarks as well as traditional ceilings on debt and deficit. Ms Merkel also wants a draconian political sanction – the suspension of voting rights – for countries that repeatedly fail to curb their borrowing.
On almost everything, the chancellor persuaded fellow leaders to accept the German position. But on suspending voting rights she was forced to admit defeat. The others would not accept such a drastic change of the EU treaty. “It is a matter of very fundamental values,” says Ms Merkel. “For that reason, suspension of voting rights will not be part of the restricted treaty change, but it is not off the agenda as a theme for the future.”
She defends her insistence on changing the treaty to enable a crisis mechanism to be established. It was not because of fear of what Germany’s constitutional court might say. “My attitude was based as much on my own European political conviction as on constitutional concerns,” she says. “If we were to face another case such as Greece after 2013 – something I hope will not happen – then we must not face the same emergency ... We need a legal provision for a situation where the stability of the euro as a whole is threatened.” That could not be achieved without treaty change.
In Brussels, Ms Merkel has been criticised for putting Germany’s national interests first in a way that her former mentor and predecessor, Helmut Kohl, would never have done. But as far as she is concerned, her battle for new rules in the eurozone has been driven entirely by her pro-European stance and a determination to ensure the survival of the currency.
“If the euro fails, then Europe will fail,” says Ms Merkel, repeating her own dramatic words to the Bundestag at the height of the Greek debt crisis in May. For the German chancellor, that is the bottom line.
Waning popularity, Not just the economy: a political tenet dispelled
Received political wisdom holds that governments benefit when economies thrive and suffer when they do not – just ask US president Barack Obama, writes Gerrit Wiesmann. Not so in Germany, where the popularity of the coalition led by Angela Merkel’s conservative Christian Democrats has waned as the economic news has turned positive.
A year ago, when the chancellor ended her partnership with the left-of-centre Social Democrats (SPD) and invited the liberal Free Democrats to join her in forming her second government, the export-reliant economy was on course to shrink 5 per cent in 2009. This year it is set to grow 3.5 per cent. In the same period, opinion polls have moved in the opposite direction. Today, they give the coalition 37 per cent approval – down 12 points since last autumn’s election. The opposition bloc of the SPD and the Greens has risen 14 points to 49 per cent.
Ms Merkel in part puts this down to the political in-fighting that dogged the government in its first months, notably a long and ultimately vain campaign by the FDP to secure tax cuts. “Initially for sure we were too occupied with ourselves in the coalition, but this period is now over and the results we’ve produced speak for our Christian Democrat-Liberal government,” she says, citing her new energy plan, which aims to boost production of renewables; budget consolidation; and healthcare reform.
With a respected poll showing that only 9 per cent of Germans attribute recovery to the government – while 42 per cent credit the world economy – it is noticeable that the chancellor does not say she expects the economy eventually to revive her fortunes. Instead, policy will prevail. “Many people will be convinced [about the government] when our decisions start to unfold their effects,” she says. “Whoever bases policy only on short-term polling trends is in the wrong job.”
But for now her energy plan – which includes extending the operational lifespans of the country’s 17 nuclear power stations – has galvanised the chancellor’s opponents and the strong anti-nuclear movement. At the weekend, 50,000 demonstrators played cat-and-mouse with 17,000 police officers in an attempt to stop a train depositing nuclear waste in a northern storage facility – protest on a scale not seen since the end of the last century.
It is the ever-more pragmatic Greens, rather than the second-placed SPD, that have profited most from such mobilisation, polling a record 20 per cent. The FDP can muster only a lowly 5 per cent. This has fired speculation that Ms Merkel might try to govern with the environmentalists after the 2014 election. She brushes aside the idea: “There are a great many differences between the Christian Democrats and the Greens.”
But such “black-green” alliances already exist at regional and local level – so “a great many” differences does not necessarily imply too many.
Copyright The Financial Times Limited 2010. Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others.
Less frank on Frankfurt
On one subject Angela Merkel refuses to be drawn: who should be the next president of the European Central Bank. Speculation in Germany is rife that the chancellor would like to see Axel Weber, president of the Bundesbank, appointed the ECB’s first German head, succeeding Jean-Claude Trichet next year. “There is not a lot to say, because no decisions have been taken,” she insists, declining even to comment on whether the job should go to a German. There had not even been a “preliminary decision”. But she adds: “We will find a worthy successor to Jean-Claude Trichet.”
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© Copyright The Financial Times Ltd 2010.
Published: November 8 2010 20:55 | Last updated: November 8 2010 20:55
This week’s summit of the Group of 20 leading economies in Seoul may be shaping up to be ill tempered, but Angela Merkel seems to be positively looking forward to it.
The German chancellor is not entirely sanguine. She is worried about the revival of trade protectionism, not least in the US Congress, and the looming threat of currency competition turning into a new trade war.
But as she takes charge of pouring tea and coffee for visitors to her office in Berlin, Ms Merkel spells out how she hopes to be a peace-maker in Seoul if any confrontation develops between the US and China about exchange rates and trade imbalances. “I do not think it sensible to have a political argument,” she tells the Financial Times.
Unlike some leaders, Ms Merkel – re-elected last year for a second term as leader of Europe’s biggest economy – says she is a true believer in the value of the G20 grouping. She defends its success since 2008 in preventing the global economic crisis turning into a prolonged depression, and wants to see the disparate group of industrialised and emerging economies put on a more permanent basis.
Where some would argue that the group is too large to be decisive, the chancellor’s advisers say she likes the size, with the number of leaders round the table about the same as a European Union summit in Brussels.
A trip to Seoul gives Ms Merkel a chance, at least briefly, to put the problems of a fractious and unpopular coalition government in Berlin to one side. A high-profile performance on the world stage might help restore her flagging poll ratings at home.
Reviving global growth and defending free trade should also make it easier to handle the financial crisis within the eurozone, where the cost of government borrowing has soared for the weaker economies in the EU’s common currency area. The threat to the cohesion of European economic and monetary union has been the chancellor’s overwhelming concern since the outbreak of the debt crisis in Greece at the start of the year.
But top of her list of priorities for Seoul is to combat any new protectionism and try once more to revive the flagging Doha round of trade liberalisation and development talks within the World Trade Organisation.
As for the problem of global imbalances, pitting the huge trade surpluses of China and Germany against the deep deficit of the US, she is bluntly dismissive of Washington’s proposal that the G20 should set quantified targets to even them up. “Exchange rates should reflect the real economic strength of a country,” she says. “Particularly in view of the debate about China, we need to find facts and benchmarks to calculate what is a fair exchange rate. I don’t think much of quantified balance of payments targets.”
Global imbalances are not just influenced by exchange rates but are also a function of competitiveness, she argues. “The competitiveness of countries depends on many more issues than just weighing up imports against exports.” Simply setting a 4 per cent target for surpluses and deficits as a proportion of gross domestic product is “far too narrowly focused”. It is a more diplomatic way of dismissing a suggestion that senior German government officials reject as “rubbish” with “no scientific or academic basis”.
Part of the concern in Berlin about the US-led debate on global imbalances is that it shoves Germany into the same corner as China, ignoring the fact that Germany cannot manipulate its currency, the euro. “You cannot look at the European Union, with its single internal market, and a common currency in large parts of it, on a country-by-country basis,” the chancellor says. “One should judge Europe as a whole.”
In spite of her confident words, however, Ms Merkel is having to defend her policies, and her country, on several fronts.
Germany is under attack not only from the US for the size of its trade surplus – a matter of great pride to most German manufacturers and economists, let alone politicians. The same trade surplus is criticised within the EU, not least by France, ordinarily Berlin’s closest political ally. Meanwhile, Ms Merkel’s policy of sternly reducing public sector borrowing and outstanding debt, even while global economic recovery remains tentative, is under fire on both sides of the Atlantic.
The chancellor is unrepentant. She dismisses fears of any double-dip recession or prolonged 1930s-style downturn as exaggerated. “As far as Germany is concerned, I do not have that fear,” she says, “and if I think of the forecasts of the International Monetary Fund, I do not fear for the world economy either.”
One cause of the crisis “was that we did not have sustainable growth. In many countries growth was built on debt and [speculative] bubbles. In contrast, I now see the world in some regions returning to a sensible growth path. The greatest danger that threatens us is protectionism, and we are still not taking enough steps to ensure genuinely free trade”.
Ms Merkel defends the achievements of the G20 so far, arguing that the group has made notable progress in terms of global financial regulation and on the most substantial reform ever negotiated for the IMF. The Basel III agreement tightening rules on bank capital Ms Merkel depicts as “a splendid thing”, negotiated in less than two years, in contrast to the previous and less ambitious Basel II deal that took more than 10 years to finalise. “If that is now put into effect everywhere, we will have created a genuine crisis prevention mechanism,” she adds.
As for the IMF, “we have achieved the most comprehensive restructuring ever” in the run-up to the summit. “The new IMF structure reflects the power relationships in today’s world much better than before.” If the heads of government had not been breathing down their necks, the G20 finance ministers would not have been forced to reach agreement, she says.
The main gap on the regulatory map, she admits, is the lack of a deal on how to regulate banks that are considered “too big too fail”. Views were split within the Basel-based Financial Stability Board and “that remains an important task for 2011”.
The other item on the chancellor’s G20 agenda is to discuss exit strategies from the massive government spending policies pursued by the leading economies – including Germany – to prevent the global recession turning into a depression. Wolfgang Schäuble, the sharp-tongued finance minister who will accompany Ms Merkel to Seoul, left no doubt about his dismay at the US Federal Reserve’s latest decision to pump $600bn into the American economy in a new round of quantitative easing. He described US policy as “clueless”.
Ms Merkel is more measured. “The G20 has repeatedly stressed that the crisis can only be overcome if we dismantle all forms of obstruction and do not erect new ones,” she says with a disarming smile.
The two most powerful figures in the German government do not always see eye to eye on policy. Mr Schäuble was Ms Merkel’s predecessor as leader of the centre-right Christian Democratic Union and sees himself as the standard-bearer for Germany’s traditionally strong commitment to the EU and to the euro. Yet on the questions of strict control of debt and deficits in all member states of the eurozone, to ensure the stability of the common currency, they are twin defenders of budget discipline.
They are joint architects of Germany’s own tough spending curbs, to cut €80bn ($111bn) over the next four years. Both are also behind a determined German push for tougher sanctions to prevent eurozone members breaking the rules embodied in its stability and growth pact – and for changes in the EU treaty to create a “permanent crisis resolution” mechanism to prevent a sovereign default.
She defends Germany’s insistence on drastic austerity measures in the weakest eurozone economies – Greece, Ireland, Portugal and Spain – as essential for currency stability and future sustainable growth. “I do not see any contradiction between growth and stability,” she says. “We have already seen the allergic reaction in the markets to countries that combined excessive debts with inadequate competitiveness.”
Sanctions agreed by EU leaders late last month will focus on competitiveness benchmarks as well as traditional ceilings on debt and deficit. Ms Merkel also wants a draconian political sanction – the suspension of voting rights – for countries that repeatedly fail to curb their borrowing.
On almost everything, the chancellor persuaded fellow leaders to accept the German position. But on suspending voting rights she was forced to admit defeat. The others would not accept such a drastic change of the EU treaty. “It is a matter of very fundamental values,” says Ms Merkel. “For that reason, suspension of voting rights will not be part of the restricted treaty change, but it is not off the agenda as a theme for the future.”
She defends her insistence on changing the treaty to enable a crisis mechanism to be established. It was not because of fear of what Germany’s constitutional court might say. “My attitude was based as much on my own European political conviction as on constitutional concerns,” she says. “If we were to face another case such as Greece after 2013 – something I hope will not happen – then we must not face the same emergency ... We need a legal provision for a situation where the stability of the euro as a whole is threatened.” That could not be achieved without treaty change.
In Brussels, Ms Merkel has been criticised for putting Germany’s national interests first in a way that her former mentor and predecessor, Helmut Kohl, would never have done. But as far as she is concerned, her battle for new rules in the eurozone has been driven entirely by her pro-European stance and a determination to ensure the survival of the currency.
“If the euro fails, then Europe will fail,” says Ms Merkel, repeating her own dramatic words to the Bundestag at the height of the Greek debt crisis in May. For the German chancellor, that is the bottom line.
Waning popularity, Not just the economy: a political tenet dispelled
Received political wisdom holds that governments benefit when economies thrive and suffer when they do not – just ask US president Barack Obama, writes Gerrit Wiesmann. Not so in Germany, where the popularity of the coalition led by Angela Merkel’s conservative Christian Democrats has waned as the economic news has turned positive.
A year ago, when the chancellor ended her partnership with the left-of-centre Social Democrats (SPD) and invited the liberal Free Democrats to join her in forming her second government, the export-reliant economy was on course to shrink 5 per cent in 2009. This year it is set to grow 3.5 per cent. In the same period, opinion polls have moved in the opposite direction. Today, they give the coalition 37 per cent approval – down 12 points since last autumn’s election. The opposition bloc of the SPD and the Greens has risen 14 points to 49 per cent.
Ms Merkel in part puts this down to the political in-fighting that dogged the government in its first months, notably a long and ultimately vain campaign by the FDP to secure tax cuts. “Initially for sure we were too occupied with ourselves in the coalition, but this period is now over and the results we’ve produced speak for our Christian Democrat-Liberal government,” she says, citing her new energy plan, which aims to boost production of renewables; budget consolidation; and healthcare reform.
With a respected poll showing that only 9 per cent of Germans attribute recovery to the government – while 42 per cent credit the world economy – it is noticeable that the chancellor does not say she expects the economy eventually to revive her fortunes. Instead, policy will prevail. “Many people will be convinced [about the government] when our decisions start to unfold their effects,” she says. “Whoever bases policy only on short-term polling trends is in the wrong job.”
But for now her energy plan – which includes extending the operational lifespans of the country’s 17 nuclear power stations – has galvanised the chancellor’s opponents and the strong anti-nuclear movement. At the weekend, 50,000 demonstrators played cat-and-mouse with 17,000 police officers in an attempt to stop a train depositing nuclear waste in a northern storage facility – protest on a scale not seen since the end of the last century.
It is the ever-more pragmatic Greens, rather than the second-placed SPD, that have profited most from such mobilisation, polling a record 20 per cent. The FDP can muster only a lowly 5 per cent. This has fired speculation that Ms Merkel might try to govern with the environmentalists after the 2014 election. She brushes aside the idea: “There are a great many differences between the Christian Democrats and the Greens.”
But such “black-green” alliances already exist at regional and local level – so “a great many” differences does not necessarily imply too many.
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Less frank on Frankfurt
On one subject Angela Merkel refuses to be drawn: who should be the next president of the European Central Bank. Speculation in Germany is rife that the chancellor would like to see Axel Weber, president of the Bundesbank, appointed the ECB’s first German head, succeeding Jean-Claude Trichet next year. “There is not a lot to say, because no decisions have been taken,” she insists, declining even to comment on whether the job should go to a German. There had not even been a “preliminary decision”. But she adds: “We will find a worthy successor to Jean-Claude Trichet.”
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Monday, November 08, 2010
Merkel warns on rise of protectionism
By Lionel Barber, Quentin Peel and Gerrit Wiesmann in Berlin
Published: November 8 2010 20:55 | Last updated: November 8 2010 20:55
The greatest danger facing the global economy is a return to trade protectionism, Angela Merkel, German chancellor, has warned ahead of this week’s meeting of global leaders in Seoul.
In an interview with the Financial Times before the G20 summit opens on Thursday, Ms Merkel suggested that China must be persuaded with “facts and benchmarks” to set a “fair exchange rate” for the renminbi, rather than be attacked for its currency policy.
Exchange rates should reflect the underlying strength of a country’s economy, she said. At the same time, she dismissed a US proposal to set specific targets for maximum levels of balance of payments’ surpluses and deficits as “too narrowly conceived”. Germany has been under attack for the size of its trade surplus.
“I don’t think much of quantified balance of payments targets,” she said, speaking in the chancellor’s office in Berlin. “It is not just a question of exchange rates, but also a question of competitiveness.” She expressed concern about new examples of non-tariff trade barriers being erected by G20 members, including in legislation in the US Congress, and “other attempts to make market access more difficult”.
Calling for a new attempt to complete the Doha development round of trade liberalisation measures in the World Trade Organisation, she added: “We have been talking about it for many years, but there is another chance in 2011 to complete it at last.
“The greatest danger that threatens us is protectionism, and we are still not taking enough steps to ensure genuinely free trade. There is something we can do that does not cost us much, and does not create any new debts, and that is to finish the Doha round. That is the priority for me.”
Ms Merkel was careful to balance her criticism of the US and China, defending the achievements of the G20 for preventing the global economic crisis turning into a prolonged downturn.
If all the member states agreed to implement the latest Basel accord on new rules for the capitalisation of banks, she said, “we will have created a genuine crisis prevention mechanism”.
She warned that more work was needed on measures to regulate banks that are “too big to fail”. “That remains an important task for 2011.”
In the longer term, she said, the G20 should be developed into a lasting institution, a job that would fall to France when it took over the presidency of the group from South Korea after the Seoul summit.
Germany is working with France to put currency co-ordination and measures to curb speculation in commodity markets at the top of the G20 agenda next year.
Ms Merkel defended her government’s plans to rein back its publicly financed economic stimulus from 2011, saying a discussion of exit strategies was necessary for all G20 members. Berlin has been criticised, especially from the US, for imposing excessive austerity measures.
She said Germany’s trade surplus, which hit a two-year high of €15.6bn ($21.7bn) in September, should not be calculated separately from the wider European trade balance. With a single market in the European Union, it was not meaningful to calculate on a country-by-country basis.
Copyright The Financial Times Limited 2010. Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others.
Published: November 8 2010 20:55 | Last updated: November 8 2010 20:55
The greatest danger facing the global economy is a return to trade protectionism, Angela Merkel, German chancellor, has warned ahead of this week’s meeting of global leaders in Seoul.
In an interview with the Financial Times before the G20 summit opens on Thursday, Ms Merkel suggested that China must be persuaded with “facts and benchmarks” to set a “fair exchange rate” for the renminbi, rather than be attacked for its currency policy.
Exchange rates should reflect the underlying strength of a country’s economy, she said. At the same time, she dismissed a US proposal to set specific targets for maximum levels of balance of payments’ surpluses and deficits as “too narrowly conceived”. Germany has been under attack for the size of its trade surplus.
“I don’t think much of quantified balance of payments targets,” she said, speaking in the chancellor’s office in Berlin. “It is not just a question of exchange rates, but also a question of competitiveness.” She expressed concern about new examples of non-tariff trade barriers being erected by G20 members, including in legislation in the US Congress, and “other attempts to make market access more difficult”.
Calling for a new attempt to complete the Doha development round of trade liberalisation measures in the World Trade Organisation, she added: “We have been talking about it for many years, but there is another chance in 2011 to complete it at last.
“The greatest danger that threatens us is protectionism, and we are still not taking enough steps to ensure genuinely free trade. There is something we can do that does not cost us much, and does not create any new debts, and that is to finish the Doha round. That is the priority for me.”
Ms Merkel was careful to balance her criticism of the US and China, defending the achievements of the G20 for preventing the global economic crisis turning into a prolonged downturn.
If all the member states agreed to implement the latest Basel accord on new rules for the capitalisation of banks, she said, “we will have created a genuine crisis prevention mechanism”.
She warned that more work was needed on measures to regulate banks that are “too big to fail”. “That remains an important task for 2011.”
In the longer term, she said, the G20 should be developed into a lasting institution, a job that would fall to France when it took over the presidency of the group from South Korea after the Seoul summit.
Germany is working with France to put currency co-ordination and measures to curb speculation in commodity markets at the top of the G20 agenda next year.
Ms Merkel defended her government’s plans to rein back its publicly financed economic stimulus from 2011, saying a discussion of exit strategies was necessary for all G20 members. Berlin has been criticised, especially from the US, for imposing excessive austerity measures.
She said Germany’s trade surplus, which hit a two-year high of €15.6bn ($21.7bn) in September, should not be calculated separately from the wider European trade balance. With a single market in the European Union, it was not meaningful to calculate on a country-by-country basis.
Copyright The Financial Times Limited 2010. Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others.
Thursday, April 08, 2010
Germany: A shifting Weltanschauung
Germany: A shifting Weltanschauung
By Quentin Peel in Berlin
Published: April 7 2010 20:21 | Last updated: April 7 2010 20:21
Paymaster no more. Angela Merkel arriving at last month’s Brussels summit, The chancellor once known as ‘Mrs Europa’ won her battle with fellow European Union leaders to resist an instant bail-out for Greece
When Angela Merkel first joined the government of Helmut Kohl as minister for women and youth affairs in 1991, the long-serving chancellor referred to the 37-year-old dismissively as “das Mädchen” – the girl.
Now she occupies his seat and she has a very different image. After her victorious battle in Brussels last month to resist an instant financial bail-out for Greece, the German media could not quite decide if she had become the Iron Lady, like Britain’s Margaret Thatcher, or the Iron Chancellor, in the tradition of Prussia’s Otto von Bismarck. Whichever it was, they liked it. Bild-Zeitung, the tabloid newspaper, ran a full-page mock-up of a memorial to Bismarck – who forged modern Germany from Prussia in the 19th century – with the head of Ms Merkel upon it. “No more the paymaster of Europe”, read the headline.
The greatest economic power in Europe, linchpin of the eurozone, Germany is not the country it was. Since 1990 – the year of reunification – it has become significantly poorer, with a lower per capita income and a lot less money to spare since pouring money into the former East Germany.
It has a new geographical perspective, too, as a central European rather than west European state. Its unquestioning adherence to the Atlantic alliance is no longer unquestioned. Its passionate commitment to European integration is also different. It has a new generation of leaders who never knew the second world war.
Does this mean Germany is no longer a reliable partner in the European Union and ally in Nato? Or does it just mean the country has become more normal, putting national interests first like its fellow members?
HELMET KOHL
‘Merkel learnt western policy like a foreign language from him’
The man most associated with Germany’s commitment to Europe in recent decades is Helmut Kohl, chancellor for 16 years, and 80 years old last Saturday. It was Mr Kohl, a ruthless party politician, who presided over reunification. Angela Merkel, the young woman from the east, became his best political pupil. And, after a party financing scandal in his Christian Democratic Union, it was Ms Merkel who forced him into political semi-oblivion.
“She is the perfect copy of Helmut Kohl,” says Professor Werner Weidenfeld of Munich university. “She learnt her western policy like a foreign language from him.” That meant she learnt the importance of forging Franco-German agreements when the two governments were most divided while also cultivating coalitions with smaller European Union members.
The difference is that she is much less willing to open the national cheque book. As chancellor, Mr Kohl regularly bought political deals in Brussels with German generosity. To win agreement on the Maastricht treaty in 1992, for example, he was the lead donor to cohesion funds for Spain and Portugal.
Ms Merkel is better than him at mastering complex briefs but lacks his conviction about the need for European integration, Prof Weidenfeld says. She is also a better operator at an EU level than she seems to be in Berlin. “What she is missing is the deep power infrastructure in every segment of party life,” he says. “He knew the personal connections and family history of every significant party member. She simply has not got that background or that memory.”
For Ms Merkel it is a tough balancing act. She has already proved herself a good European, the ultimate deal-broker in Brussels. But now she is praised at home for standing her ground over Greece.
Joschka Fischer, Germany’s pro-European former foreign minister, is appalled at the reaction to the Brussels summit. “One can hardly get one’s head round the decline in historical consciousness in our country,” he declared in the Süddeutsche Zeitung. “Neither Margaret Thatcher nor Otto von Bismarck were exactly models for Germany’s European policy, and for very good reasons. Neither had much if any conception of European integration.” The chancellor used to be praised as “Mrs Europa” for her pro-European attitude. She seemed to have reinvented herself as “Frau Germania”, he said.
Mr Fischer is famously outspoken. But his accusation picks up on a theme being debated in other European capitals: has Germany lost its European vocation and abandoned its belief in an “ever closer union” of member states? Either way, what sort of Europe would it like to see?
“Joschka goes too far,” says Volker Perthes, director of SWP, an international affairs institute based in Berlin. “He could say Gerhard Schröder, his former boss, was the first who tried to be Herr Germania. He was the one who said Germany would not be the paymaster of Europe.”
Professor Perthes, like a majority of political analysts and diplomats in Berlin questioned by this correspondent, cautions against a simplistic view of a newly selfish Germany. But the country has undoubtedly changed. “The environment is a different one,” he says. “We are not exposed on the eastern edge of western Europe. We are surrounded by a ring of friends. Germany is a bigger country, but it is also a bigger EU. What has remained is that Germany knows it needs the EU and Nato and the transatlantic relationship. The EU comes first. We know why we need it, but we are no longer prepared to be Mr Nice Guy, the big, fat paymaster, afraid of being accused of possible hegemony.
“What has changed is that the concept of national interest is no longer alien to the political vocabulary that Germans use. Our friends and neighbours always suspected that we had national interests. It is more transparent if we spell them out.”
One of the most senior European ambassadors to Berlin, and a long-time Germany watcher, sees the same shift from the other side of the table. “The accusation is that they will no longer put European interests above national interests,” he says. “I would like to hear of a single German chancellor who sacrificed German interests for Europe. Of course, Germany’s interest was in returning to normality via Europe.
“Before the euro, the Germans never came to anyone’s help in a financial crisis. They have never compromised their national interests for the sake of Europe. They [supported European integration] because they knew it was in their national interest – now, perhaps, more than ever.”
Helmut Kohl, the passionately pro-European German chancellor who presided over unification, was born in the second world war, a historian by training and inclination. Ms Merkel grew up in East Germany and trained as a physicist, analytical and pragmatic. She is pro-European by persuasion not passion.
“Germany’s European conviction today is still very clear,” the ambassador says. “But it is no longer a great love. It is rather that there is no alternative. The heroic spirit has gone. It is now a matter of normality.”
The questioning of Germany’s role in Europe concerns not only its position as paymaster. It also affects that other pillar of postwar identity: Nato membership and total commitment to the transatlantic relationship. A senior French diplomat once described the country’s attitude to the alliance as “more royalist than the king”.
That is no longer true, says Constanze Stelzenmüller, head of the Berlin office of the German Marshall Fund. “The odd thing about Nato is that the Germans have become deeply conservative, reluctant to change,” she says. “They don’t want to change the old strategic concept. They don’t want global alliances. They think the east Europeans exaggerate the Russian threat. But they are not being very innovative themselves.”
Prof Perthes does not question the commitment to Nato but sees doubts about its purpose. “They certainly don’t want to give it up,” he says. “A lot of history ties us. We owe our independence and our unity to Nato. But the threat perception has changed fundamentally.
“The old Nato enthusiasm you find today in Romania, Bulgaria or the Baltic republics. They want protection against Russia. They wanted to enter a cold war Nato. For Germany, that has gone. We are uneasy about the path Russia takes domestically but the fear of a Russian tank invasion is no longer there.”
Nor does Germany feel easy with the concept of an expeditionary Nato fighting wars around the globe, as in Afghanistan. Popular support for German troop involvement in that war is low, and waning, although Ms Merkel has agreed to a modest reinforcement.
The chancellor went to the EU summit in Brussels last month with a clear agenda: no bail-out for Greece except as a last resort. She made no effort to involve the smaller members of the eurozone in the critical negotiations, but focused entirely on getting an agreement with France in which all her preconditions would be included. Then it was presented to the rest of the group as a fait accompli. It was classic German diplomacy but with a difference: she made virtually no concessions on her initial position.
AFGHANISTAN
A growing number of German military casualties in the Nato and US-led campaign in Afghanistan has steadily increased domestic concerns about its forces’ role there. The latest round of soul-searching began on Good Friday after a German army unit based in the northern city of Kunduz was ambushed by the Taliban. Three soldiers died, taking the number killed in the seven-year-old mission to 39. In the ensuing skirmish, six allied Afghan soldiers were killed in friendly fire. This follows just six months after the army ordered an air strike on petrol tankers hijacked by the Taliban, killing or wounding 142 civilians, as a result of which Franz Josef Jung, then defence minister, was forced to resign. Both events have shocked a nation in which older citizens remember the horrors of the second world war and younger generations are raised with the mantra: “never again”. The ruling Christian Democrats and Free Democrats still largely back the Afghan campaign but the opposition Social Democrats are turning against a mission they helped launch when in government. Volker Rühe, defence minister in the 1990s, blames successive administrations for talking only about “armed conflict”. His term would confront the nation with something it thinks it has put behind it: “war”.
Yet in Berlin, senior government officials are adamant that it was not narrow national interest that motivated her. It was a conviction that hers was the only country determined to uphold the EU treaty and the stability of the euro. Any subsidised rescue package for Greece would amount to a “bail-out”, she insisted, which would offend against the treaty. It would also fall foul of the constitutional court in Karlsruhe, the guardian of Germany’s fundamental law.
The court’s judgments on the Lisbon treaty, and before it on the Maastricht treaty that laid the foundations for EU economic and monetary union, and for the launch of the euro, are an important factor behind Berlin’s insistence that its room for manoeuvre is limited. It has ruled that stability is the absolute priority for the eurozone. It also ruled that the Bundestag, as the ultimate representative of German democracy, must be more closely consulted on EU legislation.
Ulrike Guérot, Berlin representative of the European Council on Foreign Relations, fears that both the court in Karlsruhe, and the Bundestag, are becoming more eurosceptic. “Germany has changed a great deal,” she says. “There is not one purpose, it is not conscious, there is no master plan. But it is happening by default.
“The new Bundestag [elected last September] is full of 35-year-olds who have never looked at the Maastricht treaty. The concept of ever-closer union [in the EU] has gone for large parts of the political establishment. What members of parliament care about is whether the German language is used in EU institutions. They say: ‘We put a lot of money into the EU, so why shouldn’t we speak German there?”
She sees a similar trend in Karlsruhe. “The law community is the most important elite community in Germany. They have turned anti-European. The problem is not the general population. It’s the elites who no longer carry the [European] project.”
On that score, she is more alarmed than most German commentators. As the representative of a generation brought up to refer to her country as the “Federal Republic” rather than “Germany”, she perceives a creeping nationalism, although she admits it is not an aggressive one. “I am not saying it’s not normal, but there’s a huge change in political perceptions.”
So what sort of Europe does Germany want? It is unclear. Ms Guérot says there is a lack of strategic vision. The commitment to a United States of Europe is long gone. Mr Kohl admitted as much in 1993. Joschka Fischer says – with regret – that it means the EU will increasingly develop as a weak confederation of states, and not a close federation.
Ms Merkel has not spelled out her vision in detail. But she believes Europe should argue with one voice on the world stage, and that a Europe of 500m, not a Germany of 80m, will matter most in global negotiations. It is a pragmatic choice, not an ideological one.
The chancellor still sounds more ambitious than any other European leader. She wants treaty change to reinforce the stability of the eurozone. If the leaders keep using their difficulties with getting the Lisbon treaty ratified as an excuse for inaction, they will bring the EU to a halt, she says. That does not mean she believes in the European Commission as a future European government, as true European federalists once did.
On that, Ms Merkel’s advisers are perfectly clear. “The member states are the masters of the treaty,” one said during the Brussels summit. “The Commission is its servant.”
Copyright The Financial Times Limited 2010. Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others.
By Quentin Peel in Berlin
Published: April 7 2010 20:21 | Last updated: April 7 2010 20:21
Paymaster no more. Angela Merkel arriving at last month’s Brussels summit, The chancellor once known as ‘Mrs Europa’ won her battle with fellow European Union leaders to resist an instant bail-out for Greece
When Angela Merkel first joined the government of Helmut Kohl as minister for women and youth affairs in 1991, the long-serving chancellor referred to the 37-year-old dismissively as “das Mädchen” – the girl.
Now she occupies his seat and she has a very different image. After her victorious battle in Brussels last month to resist an instant financial bail-out for Greece, the German media could not quite decide if she had become the Iron Lady, like Britain’s Margaret Thatcher, or the Iron Chancellor, in the tradition of Prussia’s Otto von Bismarck. Whichever it was, they liked it. Bild-Zeitung, the tabloid newspaper, ran a full-page mock-up of a memorial to Bismarck – who forged modern Germany from Prussia in the 19th century – with the head of Ms Merkel upon it. “No more the paymaster of Europe”, read the headline.
The greatest economic power in Europe, linchpin of the eurozone, Germany is not the country it was. Since 1990 – the year of reunification – it has become significantly poorer, with a lower per capita income and a lot less money to spare since pouring money into the former East Germany.
It has a new geographical perspective, too, as a central European rather than west European state. Its unquestioning adherence to the Atlantic alliance is no longer unquestioned. Its passionate commitment to European integration is also different. It has a new generation of leaders who never knew the second world war.
Does this mean Germany is no longer a reliable partner in the European Union and ally in Nato? Or does it just mean the country has become more normal, putting national interests first like its fellow members?
HELMET KOHL
‘Merkel learnt western policy like a foreign language from him’
The man most associated with Germany’s commitment to Europe in recent decades is Helmut Kohl, chancellor for 16 years, and 80 years old last Saturday. It was Mr Kohl, a ruthless party politician, who presided over reunification. Angela Merkel, the young woman from the east, became his best political pupil. And, after a party financing scandal in his Christian Democratic Union, it was Ms Merkel who forced him into political semi-oblivion.
“She is the perfect copy of Helmut Kohl,” says Professor Werner Weidenfeld of Munich university. “She learnt her western policy like a foreign language from him.” That meant she learnt the importance of forging Franco-German agreements when the two governments were most divided while also cultivating coalitions with smaller European Union members.
The difference is that she is much less willing to open the national cheque book. As chancellor, Mr Kohl regularly bought political deals in Brussels with German generosity. To win agreement on the Maastricht treaty in 1992, for example, he was the lead donor to cohesion funds for Spain and Portugal.
Ms Merkel is better than him at mastering complex briefs but lacks his conviction about the need for European integration, Prof Weidenfeld says. She is also a better operator at an EU level than she seems to be in Berlin. “What she is missing is the deep power infrastructure in every segment of party life,” he says. “He knew the personal connections and family history of every significant party member. She simply has not got that background or that memory.”
For Ms Merkel it is a tough balancing act. She has already proved herself a good European, the ultimate deal-broker in Brussels. But now she is praised at home for standing her ground over Greece.
Joschka Fischer, Germany’s pro-European former foreign minister, is appalled at the reaction to the Brussels summit. “One can hardly get one’s head round the decline in historical consciousness in our country,” he declared in the Süddeutsche Zeitung. “Neither Margaret Thatcher nor Otto von Bismarck were exactly models for Germany’s European policy, and for very good reasons. Neither had much if any conception of European integration.” The chancellor used to be praised as “Mrs Europa” for her pro-European attitude. She seemed to have reinvented herself as “Frau Germania”, he said.
Mr Fischer is famously outspoken. But his accusation picks up on a theme being debated in other European capitals: has Germany lost its European vocation and abandoned its belief in an “ever closer union” of member states? Either way, what sort of Europe would it like to see?
“Joschka goes too far,” says Volker Perthes, director of SWP, an international affairs institute based in Berlin. “He could say Gerhard Schröder, his former boss, was the first who tried to be Herr Germania. He was the one who said Germany would not be the paymaster of Europe.”
Professor Perthes, like a majority of political analysts and diplomats in Berlin questioned by this correspondent, cautions against a simplistic view of a newly selfish Germany. But the country has undoubtedly changed. “The environment is a different one,” he says. “We are not exposed on the eastern edge of western Europe. We are surrounded by a ring of friends. Germany is a bigger country, but it is also a bigger EU. What has remained is that Germany knows it needs the EU and Nato and the transatlantic relationship. The EU comes first. We know why we need it, but we are no longer prepared to be Mr Nice Guy, the big, fat paymaster, afraid of being accused of possible hegemony.
“What has changed is that the concept of national interest is no longer alien to the political vocabulary that Germans use. Our friends and neighbours always suspected that we had national interests. It is more transparent if we spell them out.”
One of the most senior European ambassadors to Berlin, and a long-time Germany watcher, sees the same shift from the other side of the table. “The accusation is that they will no longer put European interests above national interests,” he says. “I would like to hear of a single German chancellor who sacrificed German interests for Europe. Of course, Germany’s interest was in returning to normality via Europe.
“Before the euro, the Germans never came to anyone’s help in a financial crisis. They have never compromised their national interests for the sake of Europe. They [supported European integration] because they knew it was in their national interest – now, perhaps, more than ever.”
Helmut Kohl, the passionately pro-European German chancellor who presided over unification, was born in the second world war, a historian by training and inclination. Ms Merkel grew up in East Germany and trained as a physicist, analytical and pragmatic. She is pro-European by persuasion not passion.
“Germany’s European conviction today is still very clear,” the ambassador says. “But it is no longer a great love. It is rather that there is no alternative. The heroic spirit has gone. It is now a matter of normality.”
The questioning of Germany’s role in Europe concerns not only its position as paymaster. It also affects that other pillar of postwar identity: Nato membership and total commitment to the transatlantic relationship. A senior French diplomat once described the country’s attitude to the alliance as “more royalist than the king”.
That is no longer true, says Constanze Stelzenmüller, head of the Berlin office of the German Marshall Fund. “The odd thing about Nato is that the Germans have become deeply conservative, reluctant to change,” she says. “They don’t want to change the old strategic concept. They don’t want global alliances. They think the east Europeans exaggerate the Russian threat. But they are not being very innovative themselves.”
Prof Perthes does not question the commitment to Nato but sees doubts about its purpose. “They certainly don’t want to give it up,” he says. “A lot of history ties us. We owe our independence and our unity to Nato. But the threat perception has changed fundamentally.
“The old Nato enthusiasm you find today in Romania, Bulgaria or the Baltic republics. They want protection against Russia. They wanted to enter a cold war Nato. For Germany, that has gone. We are uneasy about the path Russia takes domestically but the fear of a Russian tank invasion is no longer there.”
Nor does Germany feel easy with the concept of an expeditionary Nato fighting wars around the globe, as in Afghanistan. Popular support for German troop involvement in that war is low, and waning, although Ms Merkel has agreed to a modest reinforcement.
The chancellor went to the EU summit in Brussels last month with a clear agenda: no bail-out for Greece except as a last resort. She made no effort to involve the smaller members of the eurozone in the critical negotiations, but focused entirely on getting an agreement with France in which all her preconditions would be included. Then it was presented to the rest of the group as a fait accompli. It was classic German diplomacy but with a difference: she made virtually no concessions on her initial position.
AFGHANISTAN
A growing number of German military casualties in the Nato and US-led campaign in Afghanistan has steadily increased domestic concerns about its forces’ role there. The latest round of soul-searching began on Good Friday after a German army unit based in the northern city of Kunduz was ambushed by the Taliban. Three soldiers died, taking the number killed in the seven-year-old mission to 39. In the ensuing skirmish, six allied Afghan soldiers were killed in friendly fire. This follows just six months after the army ordered an air strike on petrol tankers hijacked by the Taliban, killing or wounding 142 civilians, as a result of which Franz Josef Jung, then defence minister, was forced to resign. Both events have shocked a nation in which older citizens remember the horrors of the second world war and younger generations are raised with the mantra: “never again”. The ruling Christian Democrats and Free Democrats still largely back the Afghan campaign but the opposition Social Democrats are turning against a mission they helped launch when in government. Volker Rühe, defence minister in the 1990s, blames successive administrations for talking only about “armed conflict”. His term would confront the nation with something it thinks it has put behind it: “war”.
Yet in Berlin, senior government officials are adamant that it was not narrow national interest that motivated her. It was a conviction that hers was the only country determined to uphold the EU treaty and the stability of the euro. Any subsidised rescue package for Greece would amount to a “bail-out”, she insisted, which would offend against the treaty. It would also fall foul of the constitutional court in Karlsruhe, the guardian of Germany’s fundamental law.
The court’s judgments on the Lisbon treaty, and before it on the Maastricht treaty that laid the foundations for EU economic and monetary union, and for the launch of the euro, are an important factor behind Berlin’s insistence that its room for manoeuvre is limited. It has ruled that stability is the absolute priority for the eurozone. It also ruled that the Bundestag, as the ultimate representative of German democracy, must be more closely consulted on EU legislation.
Ulrike Guérot, Berlin representative of the European Council on Foreign Relations, fears that both the court in Karlsruhe, and the Bundestag, are becoming more eurosceptic. “Germany has changed a great deal,” she says. “There is not one purpose, it is not conscious, there is no master plan. But it is happening by default.
“The new Bundestag [elected last September] is full of 35-year-olds who have never looked at the Maastricht treaty. The concept of ever-closer union [in the EU] has gone for large parts of the political establishment. What members of parliament care about is whether the German language is used in EU institutions. They say: ‘We put a lot of money into the EU, so why shouldn’t we speak German there?”
She sees a similar trend in Karlsruhe. “The law community is the most important elite community in Germany. They have turned anti-European. The problem is not the general population. It’s the elites who no longer carry the [European] project.”
On that score, she is more alarmed than most German commentators. As the representative of a generation brought up to refer to her country as the “Federal Republic” rather than “Germany”, she perceives a creeping nationalism, although she admits it is not an aggressive one. “I am not saying it’s not normal, but there’s a huge change in political perceptions.”
So what sort of Europe does Germany want? It is unclear. Ms Guérot says there is a lack of strategic vision. The commitment to a United States of Europe is long gone. Mr Kohl admitted as much in 1993. Joschka Fischer says – with regret – that it means the EU will increasingly develop as a weak confederation of states, and not a close federation.
Ms Merkel has not spelled out her vision in detail. But she believes Europe should argue with one voice on the world stage, and that a Europe of 500m, not a Germany of 80m, will matter most in global negotiations. It is a pragmatic choice, not an ideological one.
The chancellor still sounds more ambitious than any other European leader. She wants treaty change to reinforce the stability of the eurozone. If the leaders keep using their difficulties with getting the Lisbon treaty ratified as an excuse for inaction, they will bring the EU to a halt, she says. That does not mean she believes in the European Commission as a future European government, as true European federalists once did.
On that, Ms Merkel’s advisers are perfectly clear. “The member states are the masters of the treaty,” one said during the Brussels summit. “The Commission is its servant.”
Copyright The Financial Times Limited 2010. Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others.
Thursday, May 07, 2009
The export model sputters
Germany's economy
The export model sputters
May 7th 2009 | BERLIN
From The Economist print edition
The German habit of relying on export-led growth comes under fire
Illustration by S. Kambayashi
IT HAD been purring along nicely, handling the twists and turns of the world economy, powering past rivals, inspiring envy. But in recession Germany’s export-led model is sputtering more than most. The European Commission now expects German output to shrink by 5.4% this year, compared with a 4% drop in the European Union overall; the German government predicts a 6% plunge. Most of the contraction will be in exports.
Countries with similar models are thinking of trading them in. It is “no longer realistic to hope that Japan’s growth can come back just by exporting the same products,” the Japanese prime minister, Taro Aso, told Handelsblatt newspaper. Philipp Hildebrand, president of Switzerland’s central bank, expressed similar doubts. Germany’s economic press is peppered with articles asserting that the country “needs a new business model”.
Most German leaders disagree. The two main parties in the grand coalition, Chancellor Angela Merkel’s Christian Democratic Union (CDU) and the Social Democratic Party (SPD), are sniping before the federal election in September, but they are united in believing that exports must remain the foundation of German prosperity. Germany, unlike other rich countries, has avoided deindustrialisation, they point out. With a rapidly ageing population, it is also right to accumulate savings by running a current-account surplus. Its scant natural resources and tradition of openness point the economy towards trade. Besides, Germany just isn’t that into services, which have displaced industry in other countries.
This model could now change in one of three ways. The government could pursue an industrial policy that favoured production for the home market. To most Germans that would seem bizarre, though there is scope for creating service jobs in education or care for the elderly. Or the government could promote consumption by keeping fiscal policy relatively loose. But given German allergy to debt that is unlikely. Or change could come through a slowdown in world trade and a correction of international imbalances. This seems by far the most likely course. Germany will not deliberately surrender its position as the world’s top exporter of goods, says Bert Rürup, a former head of the government’s committee of economic “wise men” now at AWD Holding, a financial-advice firm. But its current-account surplus may fall as profligates like the United States and Britain consume less and export more.
Germany is export champion largely because it has done many things right. After losing competitiveness for years, industry clawed it back by holding down wage rises and shifting some production abroad. Germany now has “the lowest increase in unit labour costs of all its main trading partners,” says Mr Rürup. The previous SPD-Green coalition sought to reduce joblessness by trimming unemployment benefits and deregulating the labour market. Its successor has slashed the budget deficit, partly by increasing value-added tax by three points. German consumers stayed thrifty as consumers from San Sebastián to San Francisco binged on debt.
The result of this self-restraint was that exports soared in real terms, whereas consumer spending barely budged (see chart). Between 2004 and 2007 net exports accounted for 60% of growth. Germany’s current-account surplus reached a hefty 6% of GDP last year, irritating its trading partners within the euro area, which have been unwilling to hold down wages but can no longer resort to devaluation. Rather like China and Japan, virtuous Germany has made its living out of the overindulgence of others.
That was not a worry when times were good, but it is now. Exports will fall by nearly 19% this year, according to government forecasters. Germany’s debt-free households, by contrast, will cut spending by just 0.1%. The export-led recession has hurt its most prosperous regions and better-paid workers, which may be one reason why the public outcry has been muted. But recovery will not be quick. Some international trade “will disappear forever,” says Marek Belka, director of the IMF’s European department. Vehicles, machinery and chemicals account for nearly two-thirds of exports, a narrow base for the prosperity of the world’s fourth-largest economy. Vehicle manufacturing is highly vulnerable. Too many factories and workers are making too many cars globally; Germany will surely be forced to close down some production.
When recovery comes, consumption is likely to play a bigger part than exports. By 2013, net exports will account for 3.25% of GDP, down from 6.3% in 2008, says a forecast by eight economic institutes. Consumer spending, meanwhile, will rise from 56.3% of GDP to 57.75%. This shift will occur amid sluggish growth and lower employment: the trend rate of growth between 2008 and 2013 will be 0.9%, compared with average growth of 1.5% in 1995-2008, say the institutes.
Do not expect the government to encourage the change, however. Even as they battle to save carmakers like Opel, the German arm of General Motors, politicians dream of the world champions that may replace them. The SPD’s campaign programme rhapsodises about “climate and environmental technology” in which Germany supposedly has a competitive edge. IW Consult, part of the business-friendly Cologne Institute of the German Economy, thinks the growth industries will be pharmaceuticals, measurement technology and business services.
A government worried that growth is skewed towards exports could redress the balance by cutting taxes or raising spending. Dirk Schumacher, an economist at Goldman Sachs, says that the rise in VAT was a “big policy mistake” that squeezed consumption and also helped to undermine support for further economic reforms. He thinks the government should give low- and middle-income earners extra tax relief, even after the economy starts to recover. Ms Merkel may yield to pressure from the CDU’s liberal wing to make this the centrepiece of her election platform.
In the end, fiscal prudence will win out. The contraction of GDP plus the government’s two fiscal-stimulus packages will push the budget from balance in 2008 to a deficit of nearly 6% of GDP in 2010. The next government is likely to want to pare that back. Both governing parties back an amendment to the constitution to bar the federal government from running big deficits in most circumstances (and state governments from incurring any at all) after 2016. Tax will not be cut as a share of GDP, predicts Mr Rürup. The title of export champion may have lost its glitter, but Germany will not give it up lightly.
The export model sputters
May 7th 2009 | BERLIN
From The Economist print edition
The German habit of relying on export-led growth comes under fire
Illustration by S. Kambayashi
IT HAD been purring along nicely, handling the twists and turns of the world economy, powering past rivals, inspiring envy. But in recession Germany’s export-led model is sputtering more than most. The European Commission now expects German output to shrink by 5.4% this year, compared with a 4% drop in the European Union overall; the German government predicts a 6% plunge. Most of the contraction will be in exports.
Countries with similar models are thinking of trading them in. It is “no longer realistic to hope that Japan’s growth can come back just by exporting the same products,” the Japanese prime minister, Taro Aso, told Handelsblatt newspaper. Philipp Hildebrand, president of Switzerland’s central bank, expressed similar doubts. Germany’s economic press is peppered with articles asserting that the country “needs a new business model”.
Most German leaders disagree. The two main parties in the grand coalition, Chancellor Angela Merkel’s Christian Democratic Union (CDU) and the Social Democratic Party (SPD), are sniping before the federal election in September, but they are united in believing that exports must remain the foundation of German prosperity. Germany, unlike other rich countries, has avoided deindustrialisation, they point out. With a rapidly ageing population, it is also right to accumulate savings by running a current-account surplus. Its scant natural resources and tradition of openness point the economy towards trade. Besides, Germany just isn’t that into services, which have displaced industry in other countries.
This model could now change in one of three ways. The government could pursue an industrial policy that favoured production for the home market. To most Germans that would seem bizarre, though there is scope for creating service jobs in education or care for the elderly. Or the government could promote consumption by keeping fiscal policy relatively loose. But given German allergy to debt that is unlikely. Or change could come through a slowdown in world trade and a correction of international imbalances. This seems by far the most likely course. Germany will not deliberately surrender its position as the world’s top exporter of goods, says Bert Rürup, a former head of the government’s committee of economic “wise men” now at AWD Holding, a financial-advice firm. But its current-account surplus may fall as profligates like the United States and Britain consume less and export more.
Germany is export champion largely because it has done many things right. After losing competitiveness for years, industry clawed it back by holding down wage rises and shifting some production abroad. Germany now has “the lowest increase in unit labour costs of all its main trading partners,” says Mr Rürup. The previous SPD-Green coalition sought to reduce joblessness by trimming unemployment benefits and deregulating the labour market. Its successor has slashed the budget deficit, partly by increasing value-added tax by three points. German consumers stayed thrifty as consumers from San Sebastián to San Francisco binged on debt.
The result of this self-restraint was that exports soared in real terms, whereas consumer spending barely budged (see chart). Between 2004 and 2007 net exports accounted for 60% of growth. Germany’s current-account surplus reached a hefty 6% of GDP last year, irritating its trading partners within the euro area, which have been unwilling to hold down wages but can no longer resort to devaluation. Rather like China and Japan, virtuous Germany has made its living out of the overindulgence of others.
That was not a worry when times were good, but it is now. Exports will fall by nearly 19% this year, according to government forecasters. Germany’s debt-free households, by contrast, will cut spending by just 0.1%. The export-led recession has hurt its most prosperous regions and better-paid workers, which may be one reason why the public outcry has been muted. But recovery will not be quick. Some international trade “will disappear forever,” says Marek Belka, director of the IMF’s European department. Vehicles, machinery and chemicals account for nearly two-thirds of exports, a narrow base for the prosperity of the world’s fourth-largest economy. Vehicle manufacturing is highly vulnerable. Too many factories and workers are making too many cars globally; Germany will surely be forced to close down some production.
When recovery comes, consumption is likely to play a bigger part than exports. By 2013, net exports will account for 3.25% of GDP, down from 6.3% in 2008, says a forecast by eight economic institutes. Consumer spending, meanwhile, will rise from 56.3% of GDP to 57.75%. This shift will occur amid sluggish growth and lower employment: the trend rate of growth between 2008 and 2013 will be 0.9%, compared with average growth of 1.5% in 1995-2008, say the institutes.
Do not expect the government to encourage the change, however. Even as they battle to save carmakers like Opel, the German arm of General Motors, politicians dream of the world champions that may replace them. The SPD’s campaign programme rhapsodises about “climate and environmental technology” in which Germany supposedly has a competitive edge. IW Consult, part of the business-friendly Cologne Institute of the German Economy, thinks the growth industries will be pharmaceuticals, measurement technology and business services.
A government worried that growth is skewed towards exports could redress the balance by cutting taxes or raising spending. Dirk Schumacher, an economist at Goldman Sachs, says that the rise in VAT was a “big policy mistake” that squeezed consumption and also helped to undermine support for further economic reforms. He thinks the government should give low- and middle-income earners extra tax relief, even after the economy starts to recover. Ms Merkel may yield to pressure from the CDU’s liberal wing to make this the centrepiece of her election platform.
In the end, fiscal prudence will win out. The contraction of GDP plus the government’s two fiscal-stimulus packages will push the budget from balance in 2008 to a deficit of nearly 6% of GDP in 2010. The next government is likely to want to pare that back. Both governing parties back an amendment to the constitution to bar the federal government from running big deficits in most circumstances (and state governments from incurring any at all) after 2016. Tax will not be cut as a share of GDP, predicts Mr Rürup. The title of export champion may have lost its glitter, but Germany will not give it up lightly.
Monday, November 24, 2008
A measured Merkel (FT.com)
A measured Merkel
By Bertrand Benoit in Berlin
Published: November 24 2008 19:47 | Last updated: November 24 2008 19:47
Perhaps it was the grey suit, a departure from her usual red or orange wardrobe. But when leaders of the world’s 20 largest developed and developing economies convened in Washington this month to tackle the world financial crisis, participants could not help noticing how Angela Merkel faded into the crowd of her largely male colleagues clad in similar hues.
For most of her three years in office, Germany’s chancellor has shone on the international stage, helping forge a global consensus on climate change or healing a rift in the European Union over the fate of its aborted constitution. Yet as the world faces its gravest economic threat in nearly a century, the woman once dubbed “Miss World” by a German tabloid has receded into the background.
As President Nicolas Sarkozy of France and Gordon Brown, the UK prime minister, bask in praise at their decisive handling of the crisis, the talk in Whitehall, Brussels and the ornate palaces of the French Republic is of a Germany that has relinquished any claim to leadership in Europe. Having failed to appreciate the gravity of what was happening, Ms Merkel first sought to block a European response and, when she finally acted, did so in a half-hearted way.
Yet an alternative version of the story, being told in Berlin, suggests a more complex picture. A closer look at Ms Merkel’s management of the crisis suggests she may have been neither as obstructive nor as lacking in vision as her European neighbours paint her. Domestically, she has shown clearer leadership than she is often given credit for abroad and her popularity remains as high as ever. With a general election less than a year away, she seems well positioned to return to the chancellery.
On the surface, there is no shortage of evidence suggesting Germany has lost its way. Take Berlin’s approach to the failure of Lehman Brothers in September. Days after Paris and London started calling for a systemic response – the multi-billion euro bail-outs eventually adopted across the continent – Ms Merkel and Peer Steinbrück, her finance minister, were still sticking to a case-by-case strategy. The chancellor insisted there would be “no blank cheque for the banks”.
As rumours emerged that Mr Sarkozy was considering a €300bn ($384bn, £255bn) European rescue fund for the continent’s banks, Ms Merkel and Mr Steinbrück declared that they would have none of it. Only after weeks of negotiations between Paris and Berlin, culminating in two summits in the French capital last month, did Germany change its stance, signing up to a joint European framework – what Ms Merkel dubbed a “toolbox” of measures – within which member states would take simultaneous action to salvage their respective banks.
The mood has not been helped by Mr Steinbrück’s abrasive personality. Many a counterpart has grown wary of his short temper and long lectures about the alleged superiority of Germany’s “three-pillar” system of commercial, co-operative and public sector banks. Mr Sarkozy in particular has developed an animosity for the Social Democrat. “The two really hate each other,” says one Berlin official.
Even after Berlin had yielded and endorsed a more co-ordinated approach to the crisis, it persisted in taking unilateral moves. A day after the first Paris summit, Ms Merkel announced that the state would guarantee all private deposits in Germany. Her failure to inform European partners sent officials in Paris and London scrambling for their telephones. Alistair Darling, UK chancellor of the exchequer, later told parliament he could find no one at the German finance ministry to explain the measure.
“Europe’s largest economy is giving the impression that it is now acting in a purely national way – no longer in a European way,” says Joshka Fischer, the former foreign minister and Green party leader. “This is a big concern because the economic crisis will put the European project, including the euro, at risk.”
Berlin’s subsequent decisions also drew criticism. While its €500bn rescue fund was Europe’s largest, the tough penalties it imposed on the banks seeking capital injections or guarantees for their debt, and the absence of any compulsion for weakly capitalised institutions to participate, mean it has yet to attract much interest from a sector fearful of stigmatisation.
“I can only assume they designed the plan this way because they thought it would be cheaper,” says Hermann-Otto Solms from the opposition Free Democratic party.
A €12bn, two-year package of growth-boosting measures adopted this month by Ms Merkel’s cabinet drew a thumbs-down from economists. They see it as a drop in the ocean given that after three years of solid growth, Germany has entered a recession. The German government’s economic advisory council of “wise men” called the package “a loose collection of disparate measures” and said it should be at least four times as big.
So has Germany stumbled? Officials close to Ms Merkel insist it has not. The chancellor, they say, is merely the victim of superior Franco-British spin.
Germany’s apparent reluctance to embrace a co-ordinated European bail-out, for one, was a carefully calibrated decision, they say. As the debate raged, Berlin was trying to rescue Hypo Real Estate, a lender that was the most high-profile German casualty of the Lehman collapse. Too much talk of a blanket bail-out, says one Merkel adviser, would have undermined Berlin’s efforts to persuade the banks to bear part of the €50bn rescue deal for HRE – which they eventually did.
Backstage, however, Ms Merkel was engaging Paris over a co-ordinated approach. At the height of the crisis, Jens Weidmann, her top economic adviser, was in daily contact with François Perol, his Elysée counterpart.
Ms Merkel’s shooting down of the European fund idea was also right, the official insists. The idea of endowing the European Commission with full discretion as to how to spend German taxpayers’ money was so bad, he says, that Paris has since denied having ever entertained the notion. Berlin also points to the US, which abandoned an initial plan to acquire illiquid assets and has since adopted a state-financed recapitalisation programme with a European flavour, as evidence that the swiftest decisions are not always the right ones.
The adviser says Ms Merkel took an active part in shaping the European scheme. “But there would have been no point trying to steal the spotlight from Sarkozy,” the official says. “It is in the man’s nature to court attention and he holds the [rotating] EU presidency, after all. Merkel was very active. She just did not make a big show out of it.”
Even the controversial deposit guarantee, the official says, was no different from similar pledges made earlier by Mr Darling and Mr Sarkozy, though he concedes it was poorly communicated by the finance ministry, which presented it as the equivalent of Ireland’s much criticised move to guarantee all bank debt – which it was not.
As for Germany’s bank rescue package, it may not have attracted much interest from financial institutions, says a finance ministry official, but as a de facto guarantee that no bank will go bankrupt it may provide sufficient confidence for the sector to regain its footing – at a fraction of the cost faced by British taxpayers.
The fact that the unprecedented rescue package was enacted in less than a week was no mean feat considering that Ms Merkel, head of the Christian Democratic Union, heads a fractious “grand coalition” with her Social Democratic rivals and operates in a federal system. Indeed, no bill has been enacted as fast since emergency anti-terror legislation in the 1970s.
Politically, too, Ms Merkel has not played a bad hand. All opinion polls since the crisis broke out showed her adding to her comfortable lead as Germany’s most popular politician. Apart from Mr Fischer’s comments and further disapproving noise from the weak and fragmented opposition, she has faced little criticism at home. “Merkel shows people that she cares and people trust she is in control,” says Manfred Güllner of the Forsa polling group. “When she says she is not rescuing the banks to bail out managers but to preserve people’s jobs, it strikes a chord.”
Economic experts including the “wise men” have praised the government’s crisis management for averting a bank collapse – though some have also expressed misgivings about the architecture of the rescue package and the size of the fiscal stimulus.
Ms Merkel’s CDU is not nearly as popular as she is but it remains well ahead of the SPD in the polls. While holding an election today would probably not yield a centre-right majority, it would ensure her re-election either as leader of another “grand coalition” or at the head of a three-way ruling alliance with the FDP and the Greens.
CDU officials say their party does well in times of economic uncertainty, because voters credit it with more competence in that area. But Jürgen Falter, professor of political science at Mainz University, thinks the recession will favour the left once unemployment starts rising sharply. Moreover, the financial storm and the recession have already torn apart Ms Merkel’s re-election strategy, which was to focus on Germany’s underperforming education system and trumpet economic recovery as her main achievement.
The crisis has raised questions about the chancellor’s ability for improvisation and it has tested her preference for making decisions based on careful assessment. Ms Merkel has not stumbled yet at home but she will have plenty of opportunity to do so before the election next September.
Copyright The Financial Times Limited 2008
By Bertrand Benoit in Berlin
Published: November 24 2008 19:47 | Last updated: November 24 2008 19:47
Perhaps it was the grey suit, a departure from her usual red or orange wardrobe. But when leaders of the world’s 20 largest developed and developing economies convened in Washington this month to tackle the world financial crisis, participants could not help noticing how Angela Merkel faded into the crowd of her largely male colleagues clad in similar hues.
For most of her three years in office, Germany’s chancellor has shone on the international stage, helping forge a global consensus on climate change or healing a rift in the European Union over the fate of its aborted constitution. Yet as the world faces its gravest economic threat in nearly a century, the woman once dubbed “Miss World” by a German tabloid has receded into the background.
As President Nicolas Sarkozy of France and Gordon Brown, the UK prime minister, bask in praise at their decisive handling of the crisis, the talk in Whitehall, Brussels and the ornate palaces of the French Republic is of a Germany that has relinquished any claim to leadership in Europe. Having failed to appreciate the gravity of what was happening, Ms Merkel first sought to block a European response and, when she finally acted, did so in a half-hearted way.
Yet an alternative version of the story, being told in Berlin, suggests a more complex picture. A closer look at Ms Merkel’s management of the crisis suggests she may have been neither as obstructive nor as lacking in vision as her European neighbours paint her. Domestically, she has shown clearer leadership than she is often given credit for abroad and her popularity remains as high as ever. With a general election less than a year away, she seems well positioned to return to the chancellery.
On the surface, there is no shortage of evidence suggesting Germany has lost its way. Take Berlin’s approach to the failure of Lehman Brothers in September. Days after Paris and London started calling for a systemic response – the multi-billion euro bail-outs eventually adopted across the continent – Ms Merkel and Peer Steinbrück, her finance minister, were still sticking to a case-by-case strategy. The chancellor insisted there would be “no blank cheque for the banks”.
As rumours emerged that Mr Sarkozy was considering a €300bn ($384bn, £255bn) European rescue fund for the continent’s banks, Ms Merkel and Mr Steinbrück declared that they would have none of it. Only after weeks of negotiations between Paris and Berlin, culminating in two summits in the French capital last month, did Germany change its stance, signing up to a joint European framework – what Ms Merkel dubbed a “toolbox” of measures – within which member states would take simultaneous action to salvage their respective banks.
The mood has not been helped by Mr Steinbrück’s abrasive personality. Many a counterpart has grown wary of his short temper and long lectures about the alleged superiority of Germany’s “three-pillar” system of commercial, co-operative and public sector banks. Mr Sarkozy in particular has developed an animosity for the Social Democrat. “The two really hate each other,” says one Berlin official.
Even after Berlin had yielded and endorsed a more co-ordinated approach to the crisis, it persisted in taking unilateral moves. A day after the first Paris summit, Ms Merkel announced that the state would guarantee all private deposits in Germany. Her failure to inform European partners sent officials in Paris and London scrambling for their telephones. Alistair Darling, UK chancellor of the exchequer, later told parliament he could find no one at the German finance ministry to explain the measure.
“Europe’s largest economy is giving the impression that it is now acting in a purely national way – no longer in a European way,” says Joshka Fischer, the former foreign minister and Green party leader. “This is a big concern because the economic crisis will put the European project, including the euro, at risk.”
Berlin’s subsequent decisions also drew criticism. While its €500bn rescue fund was Europe’s largest, the tough penalties it imposed on the banks seeking capital injections or guarantees for their debt, and the absence of any compulsion for weakly capitalised institutions to participate, mean it has yet to attract much interest from a sector fearful of stigmatisation.
“I can only assume they designed the plan this way because they thought it would be cheaper,” says Hermann-Otto Solms from the opposition Free Democratic party.
A €12bn, two-year package of growth-boosting measures adopted this month by Ms Merkel’s cabinet drew a thumbs-down from economists. They see it as a drop in the ocean given that after three years of solid growth, Germany has entered a recession. The German government’s economic advisory council of “wise men” called the package “a loose collection of disparate measures” and said it should be at least four times as big.
So has Germany stumbled? Officials close to Ms Merkel insist it has not. The chancellor, they say, is merely the victim of superior Franco-British spin.
Germany’s apparent reluctance to embrace a co-ordinated European bail-out, for one, was a carefully calibrated decision, they say. As the debate raged, Berlin was trying to rescue Hypo Real Estate, a lender that was the most high-profile German casualty of the Lehman collapse. Too much talk of a blanket bail-out, says one Merkel adviser, would have undermined Berlin’s efforts to persuade the banks to bear part of the €50bn rescue deal for HRE – which they eventually did.
Backstage, however, Ms Merkel was engaging Paris over a co-ordinated approach. At the height of the crisis, Jens Weidmann, her top economic adviser, was in daily contact with François Perol, his Elysée counterpart.
Ms Merkel’s shooting down of the European fund idea was also right, the official insists. The idea of endowing the European Commission with full discretion as to how to spend German taxpayers’ money was so bad, he says, that Paris has since denied having ever entertained the notion. Berlin also points to the US, which abandoned an initial plan to acquire illiquid assets and has since adopted a state-financed recapitalisation programme with a European flavour, as evidence that the swiftest decisions are not always the right ones.
The adviser says Ms Merkel took an active part in shaping the European scheme. “But there would have been no point trying to steal the spotlight from Sarkozy,” the official says. “It is in the man’s nature to court attention and he holds the [rotating] EU presidency, after all. Merkel was very active. She just did not make a big show out of it.”
Even the controversial deposit guarantee, the official says, was no different from similar pledges made earlier by Mr Darling and Mr Sarkozy, though he concedes it was poorly communicated by the finance ministry, which presented it as the equivalent of Ireland’s much criticised move to guarantee all bank debt – which it was not.
As for Germany’s bank rescue package, it may not have attracted much interest from financial institutions, says a finance ministry official, but as a de facto guarantee that no bank will go bankrupt it may provide sufficient confidence for the sector to regain its footing – at a fraction of the cost faced by British taxpayers.
The fact that the unprecedented rescue package was enacted in less than a week was no mean feat considering that Ms Merkel, head of the Christian Democratic Union, heads a fractious “grand coalition” with her Social Democratic rivals and operates in a federal system. Indeed, no bill has been enacted as fast since emergency anti-terror legislation in the 1970s.
Politically, too, Ms Merkel has not played a bad hand. All opinion polls since the crisis broke out showed her adding to her comfortable lead as Germany’s most popular politician. Apart from Mr Fischer’s comments and further disapproving noise from the weak and fragmented opposition, she has faced little criticism at home. “Merkel shows people that she cares and people trust she is in control,” says Manfred Güllner of the Forsa polling group. “When she says she is not rescuing the banks to bail out managers but to preserve people’s jobs, it strikes a chord.”
Economic experts including the “wise men” have praised the government’s crisis management for averting a bank collapse – though some have also expressed misgivings about the architecture of the rescue package and the size of the fiscal stimulus.
Ms Merkel’s CDU is not nearly as popular as she is but it remains well ahead of the SPD in the polls. While holding an election today would probably not yield a centre-right majority, it would ensure her re-election either as leader of another “grand coalition” or at the head of a three-way ruling alliance with the FDP and the Greens.
CDU officials say their party does well in times of economic uncertainty, because voters credit it with more competence in that area. But Jürgen Falter, professor of political science at Mainz University, thinks the recession will favour the left once unemployment starts rising sharply. Moreover, the financial storm and the recession have already torn apart Ms Merkel’s re-election strategy, which was to focus on Germany’s underperforming education system and trumpet economic recovery as her main achievement.
The crisis has raised questions about the chancellor’s ability for improvisation and it has tested her preference for making decisions based on careful assessment. Ms Merkel has not stumbled yet at home but she will have plenty of opportunity to do so before the election next September.
Copyright The Financial Times Limited 2008
Friday, November 14, 2008
Germany in recession (FT.com)
Germany in recession
Published: November 13 2008 09:42 | Last updated: November 13 2008 20:29
Germany’s recession is now official after a 0.5 per cent fall in third quarter gross domestic product. This was worse than expected. The real shock was how badly exports have been hit as demand slumps worldwide. Export growth, which was powering ahead strongly, could come to a complete halt next year.
Thursday’s data offered up one bit of positive news – a small increase in consumer spending. But this looks unsustainable. True, German consumers have more to fall back on compared with their more profligate counterparts in the UK and the US: the savings rate in Germany has actually been increasing. Furthermore, the labour market has continued to improve, which has helped to strengthen disposable incomes. But that will not last. The employment outlook is bleak. Bank of America forecasts a 500,000 increase in the number of unemployed next year. Consumers fearful of job loss are unlikely to open their wallets, even if they have no pressing need to rebuild tattered finances.
Such dire numbers, especially if echoed across the rest of Europe, now make interest rate cuts from the European Central Bank more than likely. A 50 basis points cut in December from the current 3.25 per cent looks in the bag and most expect rates to come down to 2 per cent early next year. Less certain is whether the German government will feel the need to do more on the fiscal front. It has already conceded with one package but shows little appetite to do more.
Employers will urge workers to do their bit to improve their chances in a tough job market by embracing wage restraint – Germany’s largest trade union has just moderated its pay demands. That might temper, but not significantly offset, the damage from a global slowdown. Of course, when the cycle turns again, German households and companies will be relatively well-placed. Right now, that is cold comfort.
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Copyright The Financial Times Limited 2008
Published: November 13 2008 09:42 | Last updated: November 13 2008 20:29
Germany’s recession is now official after a 0.5 per cent fall in third quarter gross domestic product. This was worse than expected. The real shock was how badly exports have been hit as demand slumps worldwide. Export growth, which was powering ahead strongly, could come to a complete halt next year.
Thursday’s data offered up one bit of positive news – a small increase in consumer spending. But this looks unsustainable. True, German consumers have more to fall back on compared with their more profligate counterparts in the UK and the US: the savings rate in Germany has actually been increasing. Furthermore, the labour market has continued to improve, which has helped to strengthen disposable incomes. But that will not last. The employment outlook is bleak. Bank of America forecasts a 500,000 increase in the number of unemployed next year. Consumers fearful of job loss are unlikely to open their wallets, even if they have no pressing need to rebuild tattered finances.
Such dire numbers, especially if echoed across the rest of Europe, now make interest rate cuts from the European Central Bank more than likely. A 50 basis points cut in December from the current 3.25 per cent looks in the bag and most expect rates to come down to 2 per cent early next year. Less certain is whether the German government will feel the need to do more on the fiscal front. It has already conceded with one package but shows little appetite to do more.
Employers will urge workers to do their bit to improve their chances in a tough job market by embracing wage restraint – Germany’s largest trade union has just moderated its pay demands. That might temper, but not significantly offset, the damage from a global slowdown. Of course, when the cycle turns again, German households and companies will be relatively well-placed. Right now, that is cold comfort.
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