Germany’s astonishing U-turn from an austerity champion to a spending champion
The adoption of the € 750 billion recovery package not only marks a milestone in European solidarity, it also reflects a U-turn that the German government has made regarding its former austerity-led policy line.
Unforgotten are Berlin’s “Sparappelle” towards the EU’s south in the aftermath of the financial crisis of 2008/9, appealing to Greece and others to make harsh savings on public spending.
Here is my two pennies’ worth as to what made Berlin rethink its strategy:
The recovery package is only the EU-wide extension of an even more radical domestic Covid-19 recovery package.
Fiscal stimuli adopted by the German government include guarantees and loans for companies but also compensation of income losses for small enterprises and freelancers; a stability fund to support bigger companies; “Kurzarbeit” (government-sponsored short-term work arrangements to keep the work force employed during times of crisis); VAT reduction as well as stimuli to buy electric vehicles.
All in all representing nearly 30% of domestic GDP. The sheer size of the domestic recovery measures is quite remarkable as Germany’s response to the 2008/9 financial crisis was far more limited in scope, mainly focusing on supporting “Kurzarbeit”.
So Berlin turned from an austerity champion into a spending champion. How come?
First of all, I do believe that the austerity measures imposed on Greece by EU and IMF following the 2008/9 financial crisis, which not only created enormous social hardship but also seemed, at least temporarily, to aggravate the economic crisis in that country, are now considered inadequate if not harmful, to master a crisis of the type we are facing today.
Secondly, Germany’s economy has a structural weakness: it is highly dependent on exports, hence most vulnerable when the rest of the world stops ordering goods made in Germany.
So supporting the afore-mentioned € 750 billion package is probably not only an act of sheer empathy Berlin is making towards its European partners and in particular those on the EU’s southern rim that were hardest hit by the pandemic, but also driven by tangible economic interests: two thirds of German exports go into the EU, with France, Italy, Spain and Greece having imported goods from Germany in the order of EUR 225 billion in 2019 alone.
The interconnection of European industries, in particular in the automotive sector, puts supply chains under strain when important nodes for the production of parts, like Northern Italy, are under lockdown.
Investing into healthcare, which is the main destination of the European recovery package, is hence not only crucial to saving lives, it will also help keep the economy going.
However, cold-blooded financial considerations will, in my view, not do justice to Angela Merkel and her motivation for supporting the package.
That member states drift apart as a result of the initial pandemic containment when they were rather looking to protect their own people than to help each other, was a major concern in most capitals of Europe, together with the rise of populist, anti-European movements.
Germany, together with France being considered for decades the motor of Europe, can simply not afford to let Europe disintegrate. After all, Angela Merkel is the successor of prominent pro-European German leaders, including Konrad Adenauer and Helmut Kohl.
Their unwritten legacy – one might wonder – is to keep the European Union alive and to further develop it.
The majority of political observers and economists seem to support the course Berlin has taken, regarding both the domestic and European recovery packages. Moreover, Angela Merkel can rely on a fundamental pro-European consensus amidst the German people.
The 2018 Eurobarometer revealed that 81% of Germans regard the European Union as a place of stability in a troubled world (EU28: 76%). All political parties represented in the Bundestag are essentially supporting the European project, except for the right-wing AFD (Alternative für Deutschland).
Only the future will tell us if the billions of Euros of recovery monies are going to be invested well and making an impact. But so far, Brussels and Berlin, in sync with the other member states, seem to have done their utmost to cushion the negative effects of the crisis.