ourEconomy: Opinion

Angela Merkel’s departure is an opportunity to fix the EU

As the four-term chancellor leaves the European stage, strict fiscal rules can finally be abandoned in favour of public investment

Benoît Lallemand
24 September 2021, 12.01am
Merkel has been a beacon of consistency for 15 years. What comes next?
Julian Stratenschulte/dpa/Alamy Live News

It will probably take a while for the fact that Angela Merkel is no longer Germany’s chancellor to sink in. It is hard to remember life before ‘Mutti’. When she came to power in 2005, no one had heard of YouTube. iPhones didn’t exist. The global crash of 2008 wasn’t on anyone’s radar.

Merkel has been a beacon of consistency in a world that has bucked wildly from one crisis to another for over a decade, and she has become an icon of centrist stability in a time of extremes.

But while it’s true that Merkel’s Germany has been relatively stable throughout the chaos in European and world politics over the past 15 years – Europe’s instability has in part been fuelled by Merkel’s strict insistence on sticking to the fiscal rules that have dictated the policies of the Eurozone since its inception.

Current fiscal rules limit public debt to 60% of GDP, and annual budget deficits to 3% of GDP. These have been guiding principles for Germany during Merkel’s tenure – even though her reform-driven predecessor Gerhard Schroeder neglected them in the early 2000s, when the German economy required stimulus a decade after reunification.

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This obsession with imposing the fiscal rules left the ‘PIIGS’ countries (Portugal, Italy, Ireland, Greece, Spain) in dire straits in 2008, leading to political upheavals that we’re still living through today.

‘Stability’ has also been shorthand for slow growth and a trade surplus that has been criticised by everyone from Donald Trump to the Ifo Institute for Economic Research, one of Germany’s most respected think tanks.

But during the COVID-19 pandemic, governments across Europe have thrown the rule book out the window with the introduction of the Next Generation EU packages. Now, a new question arises for Germany and the rest of Europe: is a ‘return to normal’ possible – or even desirable?

Merkel’s personal brand and consistency have helped keep the EU afloat

Germany’s finance minister and likely future chancellor, Olaf Scholz of the Social Democratic Party (SPD), has been reluctant to abandon the fiscal ‘prudence’ of the Grand Coalition (the alliance of the SPD and Merkel’s Christian Democratic Union). But he has signalled a preference for a coalition with the Green Party, which supports big public spending and borrowing.

The fiscal rules set after the election will have huge ramifications for the future of Europe – not just as an economic entity but as a political one, too.

Merkel’s personal brand and consistency have helped keep the EU afloat. But as she departs, Germany and the EU will soon be forced to confront the political issues dodged under her tenure. Viktor Orban’s Hungary has become a beacon for right-wing populism on the continent and internationally, and the country is increasingly confident in flouting EU norms. Poland’s Law and Justice party (PIS) looks on in admiration, as do parties across the continent.

Tackling these political issues will be extraordinarily difficult if the EU and Germany impose stringent fiscal rules on the rest of the continent. Berlin and Brussels will be well aware that the perception of unfair economic impositions was a powerful driver for pro-Brexit campaigners.

The EU’s Next Generation fund will unleash historic investment aimed at kickstarting post-pandemic economies. But this opportunity will be wasted if it is treated as a one-off payment, particularly if governments are then obliged by fiscal rules to start paying back debts and halt borrowing. For example, if the government of Italy is forced to slash its national debt to 60% of GDP from the current 160%, this would trigger devastating austerity that would quickly undo any good – and any goodwill – brought by the Next Generation injection.

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The current crisis urgently calls for visions for the EU and, indeed, the world post-COVID-19.

Austerity after the 2008 crash was sold as a tough but necessary measure – even as it caused upheaval and pain across the union and drew a dividing line between the so-called ‘PIIGS’ and nations that prided themselves on ‘frugality’.

But the EU’s economics commissioner Paolo Gentiloni now says that the euro debt crisis was “a mistake”. Meanwhile, in her ‘State of the Union’ speech on 15 September, Ursula von der Leyen, president of the European Commission has said that the EU “learned the lessons from the past” in its approach to the COVID-19 recovery.

One sincerely hopes so. Even before the pandemic, Europe was facing enormous challenges in decarbonisation, social care and sustainability, which require massive, medium- to long-term investment, and coordination across the EU. These things will not happen if, for the second time in less than a generation, the richer countries in the union handcuff the poorer ones by making impossible-to-meet demands.

Polling has shown that populations in southern and eastern Europe are more likely to believe they have been adversely affected by the pandemic than those in the north. More worryingly still, young people across Europe feel they have borne the brunt of the COVID-19 outbreak: 57% of under-30s say they have personally felt the impact of the pandemic, which is significantly more than the 35% of the over-60s.

The economic prospects of this generation are already blighted by the gig economy and the climate crisis created by their parents and grandparents. A new wave of spending restrictions, imposed by Germany and other EU countries with wealthier and older populations schooled in a false notion of prudence, could create permanent disillusionment with the European project among millions of young people.

With nationalists and populists keen to take advantage, this is a path that the EU cannot afford to take.

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