27 May 2013

Spiegel: Austerity about-face - German government to gamble on stimulus

With the euro crisis refusing to relent, the German government is backing away from its austerity mandates and planning to spend billions to stimulate ailing economies in Southern Europe.

Berlin is making an about-face, even though it aims to stick to its current austerity policy. The German government has stressed budget consolidation and structural reform since 2010, when Greece was on the verge of bankruptcy. Berlin has been arguing that this is the only way to instill confidence among investors in the battered debt-ridden countries and help their ailing economies recover.

But now, several rounds of cuts later, the politicians who had set out to save the euro must now look on as the economies of ailing Southern European countries are once again slumping while unemployment is on the rise. To come to grips with the problem, Merkel and Schäuble are willing to abandon iron-clad tenets of their current bailout philosophy. In the future, they intend to provide direct assistance to select crisis-ridden countries instead of waiting for other countries to join in or for the European Commission to take the lead. To do so, they are even willing to send more money from Germany to the troubled regions and incorporate new guarantees into the federal budget.

The government's change of heart isn't just a sign of selflessness and compassion. More than ever, the chancellor and the finance minister are worried that Berlin's tightfisted, heartless, austerity-obsessed image could solidify throughout Europe and do irreparable political damage. An exporting nation that sells two-thirds of its exports to other European countries cannot be unconcerned about its image abroad, they reason, especially when its government fears that constant criticism from the centre-left Social Democratic Party (SPD) and the Green Party, claiming that it is acting as the grave-digger of the euro and dividing the EU, could hurt it in the upcoming election campaign.

Merkel and Schäuble hope that their initiative could help Merkel's coalition government of their centre-right Christian Democratic Union (CDU), its Bavarian sister party, the Christian Social Union (CSU), and the business-friendly Free Democratic Party close its open flank. This time, instead of just acting in concert, cabinet ministers with the three coalition partners are actively cooperating.

Germany could also invest in a €1.2 billion/$1.6 billion venture capital fund that could be used to support new business activities. Madrid hopes that the programme will generate a total of €3.2 billion in new investment. The agreements with Spain are intended to serve as a blueprint for similar aid to Portugal and possibly even Greece. How high the payments to these countries will be has yet to be determined. "It will be nothing to sneeze at", say Finance Ministry officials. The German government envisions spending a total in the single-digit billions on the programme. Schäuble plans to fill in the budget committee in the German parliament, the Bundestag.

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