Philip Stephens: Europe faces a bigger threat than German caution

The world must seem a confusing place if you are sitting in Angela Merkel’s chair. The chancellor has been under sustained international fire for the stellar performance of German companies in global markets. Now Ms Merkel’s critics are accusing her of beating a retreat from the economic reforms that have underpinned this success.
For the past several years, Germany has been berated as the villain of the single currency. Berlin, the popular (do I mean populist?) narrative has run, has refused to bail out the eurozone’s troubled periphery. It will not put its imprimatur on a new class of eurobonds. Germany’s hefty current account surplus has pushed Greece, Spain, Portugal and others into savage deflation. The strains on monetary union are not the fault of the weak economies but of Germany’s super-competitiveness.
There is quite a bit wrong with this argument. Greece’s problems have more to do with an absence of effective governance in Athens than with the fact that Mercedes and BMW produce really nice cars. The boom-to-bust housing markets in Spain and Ireland can be linked only tangentially to the technical skills of Germany’s machine tool industry. Italy is, well, Italy. France is still terrified of letting go of the past.
Germany could and should have done more to stimulate its domestic economy. Austerity is sometimes a necessary evil, but it should not become a religion. Ms Merkel’s habit of pushing each rescue operation to the wire added greatly to the costs of stabilising the single currency. More broadly, imbalances in the international system are better dealt with if creditor as well as debtor nations shoulder some of the burden.
That said, the impact of a more robust German economy would have been very marginal. A little extra growth in Germany would not materially have reduced the pain of fiscal and structural adjustment in the eurozone south. Even British politicians, who congratulate themselves for having stayed out of the euro, have had to share in the post-crash misery.
Now consider international reaction to the pact Ms Merkel’s ruling Christian Democrats have signed with the opposition Social Democrats. Assuming it has won the backing of SPD members – the result of a referendum of party activists is due this weekend – the accord is supposed to provide a policy compass for a grand coalition.
Germany’s most ardent admirers would be hard-pressed to describe the agreement as an inspiring document. The elements that have grabbed the headlines have a distinctly retro feel. At the insistence of the SPD, Germany is to get a minimum wage, the retirement age will be lowered for those longest in employment, older mothers will get better pensions and workers will keep their employment protection.
To the extent that these measures will have an identifiable impact – and the pact leaves the commitments more carefully hedged than media headlines have admitted – they are likely to loosen somewhat the fiscal reins and push up wages. In other words, they should increase domestic demand and make German industry a little less competitive than it might otherwise have been.
The package received predictably harsh reviews from the Bundesbank and German employers but Ms Merkel might have expected modest applause from an international audience that has called for a more expansionist policy. Not a bit of it.
The Economist caught the mood with an editorial haranguing Ms Merkel’s concessions to what it called the SPD’s “leftish agenda”. German productivity, the magazine scolded, had been rising less than half as fast of that of Spain. No European country had carried out fewer reforms than Germany in recent years. Berlin, it seemed to say, should embark on new reforms to reopen the competitiveness gap with other eurozone states. As I said, Ms Merkel must be totally confused.
In truth, the significance of the coalition agreement lies not in what it prescribes for Germany, but in what it says about a wider affliction. Europe suffers from an excess of caution. Globalisation has turned the world upside down. Europe’s response is to pretend otherwise.
A chronic aversion to risk stunts decision-making across the continent. Manifested in Germany by high savings rates or the closure of nuclear plants, it is also at the heart of immobility in France, where politicians and voters behave as though they can stop the world and jump off. Why should the French pay attention to what is happening anywhere else?
The insider-outsider psychology stokes nationalist fires against “job-stealing” immigrants. Supposedly freewheeling Britain is hamstrung by antiquated planning laws and immovable vested interests. David Cameron’s government runs scared even of expanding London’s overcrowded airports.
The euro has not made life easy for Europe but, in a curious way, it has crystallised the choice between modernisation and stasis. Fiscal deficits matter; so do unit labour costs. What Europe really misses, however, is the economic dynamism that comes with a willingness to strike out in new directions.
The risk aversion is readily explicable – it comes with relatively high living standards and ageing populations. It is no less dangerous for that. Doing nothing is as much a policy choice as doing something. Europe’s best hope of holding on to its prosperity and its liberal political order is to embrace the need to change. Ms Merkel is a cautious leader, but Germany has done better than most to adjust to globalisation. The threat to Europe is Europe itself.

Philip Stephens

Fonte: FT