Column: Europe faces recovery with German handbrake | WKZO | All Kalamazoo

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By Mike Dolan

LONDON (Reuters) – As German opinion polls turn drastically from green to conservative ahead of September’s election, the prospect of a post-pandemic overhaul of euro area fiscal policy and debt financing is growing darkens with them.

Just six weeks ago, the odds of having a Green Party first chancellor were very real, judging by the huge polls for green candidate Annalena Baerbock. And it was widely touted in financial markets as a potentially seismic moment in German national and European economic policy.

But the polls have since returned to the conservative CDU led by Angela Merkel and their sister party CSU. With Merkel’s resignation, the alliance led by candidate Armin Laschet has advanced in the nine polls released so far in June – a lead widening to almost 10 points at the latest.

A series of Baerbock gaffes and missteps have been blamed by local pundits, while online prediction markets betting on the next chancellor have exploded in Laschet’s favor.

In light of this resurgence, Monday’s conservative manifesto was for many a bucket of cold water on hopes the eurozone could shift to a looser fiscal framework and a more integrated funding position once the pandemic finally ends. past.

Criticized nationally for giving seemingly unfunded tax breaks to high incomes, the plans demand a return to Germany‘s constitutional “debt brake” – limiting structural deficits to 0.35% of gross domestic product – and a target of bringing debt / GDP below 60% from that. 70% pandemic-related eruption of the year.

Reform of the euro area’s fiscal rules has been categorically rejected. The manifesto calls for a return to the status quo ante and to “quickly restore” the Stability and Growth Pact (SGP) suspended during the fight against COVID-19.

He also insists that the 800 billion euros ($ 955 billion) in EU-wide funding for the Post-Pandemic Stimulus Fund is one-off and not the start of a “union of the debt”.

While none of this is a radical departure from existing conservative thinking, it stokes new fears of a return to the euro austerity policies that many blame for the paltry and faltering economic rebound in the area. euro after the bank crash and the sovereign debt shock of the last decade. .

They also stifle Green Party proposals such as reform of the SGP and the permanent integration of the EU stimulus fund into the EU budget in order to invest in a ‘green transition’.

‘RECIPE FOR A DISASTER’

Some economists see it less as a return to normal than a step in the dark.

“Laschet’s plea for a return to pre-pandemic fiscal rules is a recipe for disaster – pushing for a slower recovery, divergence and eurozone breakdown,” said Philipp Heimberger of the Vienna Institute for International Economic Studies.

So many good reasons for investors to sit down and take notice.

Even though markets have been obsessed lately with the runes of signals from the US Federal Reserve or the big spending surge from Washington, the German campaigns have potentially profound implications for the future of the euro, cohesion with the block and another gigantic task ahead for the European Central Bank. .

“The CDU manifesto paves the way for more fiscal flexibility and therefore a stimulus at the national level – but hardly at the euro zone level”, concludes ING’s global head of Macro, Carsten Brzeski, speaking of ‘a “Germany first” investment program which is “bad news”. for euro federalists.

Brzeski warns, however, against too hasty reading the polls and still sees a CDU / Greens coalition as one of the most likely outcomes of the election. Even though a Green Chancellor seems less likely, he points out that German voting intentions appear to be smoother and subject to larger fluctuations than normal.

Merkel said on Tuesday that Germany may need to spend “gigantic” sums on high-tech industry and cleaner energy in the years to come and that state aid would be needed. But she stuck to the party line, saying that was the reason the public finances had to be brought under control now.

If this type of budget restriction outweighs any overhaul of taxation and green investments after September, the slowdown in the growth potential of Germany and the euro zone will underline what ECB President Christine Lagarde described on Monday. of “different situation” between the United States and the euro area.

As such, this does not bode well for the prospect of positive German government bond yields or a sustained rise in the euro over time.

($ 1 = € 0.8379)

(by Mike Dolan, Twitter: @reutersMikeD; edited by Mark Potter)

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