Germany's federal election on September 22 was a personal triumph for the chancellor, Angela Merkel. Her own continuation in that position for a third successive term is assured even as the tortuous process of forming a governing coalition proceeds. Her strong political mandate largely reflects the health of the German economy, with low unemployment and inflation, a near-balanced budget and the resumed prospect of growth following a recent mild recession, as well as her own personal popularity with the electorate.
With her refreshed mandate, the chancellor will be in an even stronger position than before to guide the evolution of both the euro zone and the European Union (EU) at a critical moment for both. The fate of both these entities matters profoundly to the rest of the world and to India. The EU remains the world's largest economy and trading entity, while the success of the euro as a common currency has provided the world with a viable alternative to the dollar as a reserve asset. Europe also provides a broad spectrum of philosophies and achievements in the vexed area of affordable and compassionate social protection in a globalised world.
In brief, Europe could provide an important alternative to the superpowers of the United States and China in the decades ahead, but only if it resolves the deep fissures that the current economic crisis has generated. As noted by some European commentators prior to the recent election, after a violent and turbulent century and a half following its initial unification in the 19th century, Europe has reason to be comforted by the Germany of today. It is a nation that has successfully dealt with the demons of its terrible 20th century, and is deeply committed to a pluralistic, rule-based constitutional democracy.
Two days at a conference in Germany recently provided an opportunity to reflect on both the challenges facing Germany and Europe and the deep strengths of both. The conference in question was the Global Economic Symposium, a German adaptation of Switzerland's World Economic Forum. It was held in the northern port town of Kiel, a port on the Baltic Sea, not far from Germany's border with Denmark, and linked to the North Sea by the Kiel canal. The conference location itself well captures the dual pulls on Germany following its recent reunification, firmly anchored to the Atlantic alliance led by the US but also linked to Russia and its former satellites (notably Poland) to its east.
The theme of the conference was "Redefining Success", an almost Gandhian plea for a move away from a lifestyle dedicated to increased material consumption to one animated by the intangible pleasures of self-realisation and service to others. This apparently quixotic quest drew upon the deep German attachment to nature and the environment as well as recent attitudinal and neurological research on the drivers of happiness. This quest for environmental sustainability enjoys bipartisan political support, even if it sits uncomfortably with the German talent for designing powerful luxury cars and the passion for driving these at speeds of over 160 kilometres per hour on the autobahn as I experienced on my drive there and back.
Sustainability, however, has fiscal, financial, social and political dimensions as well, and these figured prominently in the sessions. On the euro zone there was both good and bad news. The good news (expressed by none other than George Soros) was that the risk of a break-up of the euro zone had substantially diminished. The less good news (endorsed by a senior International Monetary Fund representative) was that, in the absence of profound institutional and structural reform, within countries and in the zone as a whole, the prospects were for prolonged economic stagnation in the euro zone despite the glimmer of recovery from recession that is currently visible.
A recent article in Financial Times provided a grim summary of where matters currently stand. In comparison with the first half of 2007, euro zone GDP six years later is lower by 1.3 per cent. For Spain the number is 5.3 per cent and for Italy it is 8.4 per cent. These are the numbers for the larger economies in the euro zone: the plight of a Greece or a Cyprus is considerably worse. An important differentiator between the experience of Europe (not just the euro zone, but also the United Kingdom) and that of the US has been the quicker recovery of the banking system in the case of the latter.
Through credible stress tests and the provision of resources under the Troubled Assets Relief Programme (TARP), the US federal government and regulators forced transparency in the balance sheets of banks and infusion of fresh shareholder capital so that the banking system is back in the lending business. This process has been much slower in Europe largely because of the fragmentation of supervision among national regulators and the even greater political power of banks in Europe than in the US. It is for these reasons that "banking union" has come to be seen as perhaps the most urgent institutional reform facing the euro zone. Germany has signed up to the first stage of this process, namely the transfer of banking supervision for the largest European banks to the European Central Bank. It has so far been more cautious about other dimensions of banking union, such as resolution authority and deposit insurance that could expose its taxpayers to unpredictable risk.
Other near-term challenges include the continuing political uncertainty in Italy, the restiveness of the UK's Conservatives, the weakness of the French economy and the need for a further revision of the Greek programme. These are daunting challenges. Yet it is important to remember how far the EU, and more especially the euro zone, has been able to come since 2010 despite a cumbersome decision-making structure. Germany faces its own domestic challenges: improving infrastructure, raising educational quality, and dealing with an ageing population. Yet the strong sense I was left with was of a resolute determination among Germans to persevere with the European project, despite the odds. I for one wish them, and their chancellor, success.
The writer is chief economist, Shell International.
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