Germany recently installed a new Economics Minister, Karl-Theodor zu Guttenberg. He does not have much experience, it seems, with past economic crises, and seems not have an economic background to a degree which is usually appropriate.

However, zu Guttenberg has given the positive impression of a go-getter in his recent first speech at the German parliament and in various interviews. In contrast to his predecessor he charmed the journalists while not succumbing to the socialist ideas of Chancellor Angela Merkel or Finance Minister Steinbrück. Instead, he proposed a major tax reform for 2010, supported by his party, the conservative Christian Socialists of Bavaria, the sister party of the CDU.

Angela Merkel soon had to follow suit in order to avoid leaving an open door for other proposals by also suggesting a tax reform during the next government period (which would leave room to implement such a reform between 2010 and 2013 - four years in total).  Now the Social Democrats have to think about how to answer this – as tax reform sounds of neo-liberalism, the undefined word which socialists usually use effectively to fend off any anti-socialist policies. And the major election year of 2009 may have more surprises, such as the grown support for the liberal democrats who are on the forefront of tax reform ideas.

The outcome of this remains to be seen. Already, markets seem to calm slightly and new ideas on how to tackle the financial crisis spring about. While far from over, it seems people have become accustomed to the crisis and are trying to cope as well as they can, using new incentives provided by the stimulus packages in Germany and around the EU.

Are there signs of a silver lining on the horizon? It seems so, but the sceptics have to be convinced, too. That may take some time still, but spring is coming and Germany has been quite active in recent months… A new ministerial face may add to a positive outcome.

 

Bargain Britain beckons buyers

February 2009

Up to only a few months ago, British citizens hedged their highly-valued stocks of sterling in Continental European assets, such as German, French or Spanish real estate. Now, after the acceleration of the financial crisis, the pound has declined significantly and banks such as RBS or HSBC seem a bargain in the stock markets, especially from the Euro point of view.  

Britain had an advantage over Euro zone countries: it can fine-tune its economy, focusing on interest rates and exchange rates. As it is not bound in fiscally to the rest of Europe, it may decrease or increase taxes depending on its economic needs.  

While the Europeans are still bickering about amounts or reasons for tax decreases or direct subsidies for industries such as car makers, the British have already shown they can take decisive action. Furthermore, instead of subsidising selected industries, they have taken a wider approach.

Bleak as the outlook may have been, there is already a silver lining on the horizon. Write-offs of bad debt or toxic assets may be huge, but compared to the total assets of UK financial institutions they no longer seem quite so high. The onus is now on the banks to announce that their position has indeed become somewhat more comfortable. Now that they have been shored up by state intervention, they should make a big effort to accelerate lending, both among each other and to business and private customers.

Across the world, when the upturn finally gets under way, risk assessment procedures will need to be very different. In particular the international rating agencies, which have been singled out as bearing a considerable amount of responsibility, have been placed under pressure to upgrade their policies drastically. This should result in more transparency for the financial markets and their participants, which should all feed through to help the position of the consumer. 

Some of us can remember how Britain in the early 1970s was a bargain because of sterling’s fall against European currencies. Now, the patter seems to be repeating itself. UK real estate, stock prices and other assets have all fallen to levels that portend considerable interest from foreign investors, even if some lows may still be tested in the next few months. It will be instructive to review the position again at the end of 2009. Those who invested early on in 2009 may turn out to be the lucky ones. And Britain, having been the speediest to feel the brunt of the recession, may – with a bit of luck – make the most rapid escape from it.

 

Will Germany’s parties come up with the goods?

August 2008

One thing the Germans will have in abundance next year: elections. 2009 sees the general election where Angela Merkel will be defending her generally successful four-year chancellorship as well as several important state elections.  Both partners in the Berlin Grand Coalition, the Conservative CDU and the Social Democratic SPD, are desperately trying to establish issues on which they can attract voters.  

There are two highlights of the summer theatre of political point-scoring. On energy issues, the CDU is trying to use the rise of oil and gas prices as a justification for pushing further the nuclear energy option, The SPD, for its part, is targeting the subject of the minimum wage, on the grounds that an ever greater number of the population is falling behind in the poverty stakes. 

Neither of these issues musters much enthusiasm; indeed, it is somewhat depressing that, on both questions, the main parties have already fought many skirmishes without resolving anything. The Germans have shown their negative views on nuclear energy in many previous elections, giving the Greens consistently solid backing over the years. A recent polls shows a change of emphasis: there is now a majority support for extending the life cycle of existing nuclear power plants, but this hardly adds up to compelling backing for nuclear energy per se. Underlying strong scepticism about the safety of nuclear power makes it unlikely that the CDU will ever turn this issue into an election winner.  

The minimum wage is also not an issue that will draw millions of voters to the SPD. Even within specific industrial areas where most supporters would be expected, there is only lukewarm backing. 

The parties manifestly need a new approach on energy, perhaps the most powerful subject of all. But how should they go about generating it? Former US Vice President Al Gore, who has become America’s best-renowned Green advocate, has recommended a 10 year effort to recast US energy policy, based on a balanced mix of renewable energy,  nuclear energy, and systematic energy saving. This is a programme worthy of emulation in Europe – including Germany. 

Energy saving needs to take a much greater priority.  Japan, for example, is already banning stand-by functions of electronic devices, and improving standards to illustrate how much energy such products waste. Germany and other countries are lagging behind. The CDU would be well advised to launch a Gore-like energy saving plan, equipped with accompanying measures such as economic incentives and tax breaks, and link it to the nuclear option.  

More imagination, too, is needed on the issue of low wages: rather than pressing home the unattractive minimum wage issue, the SPD would do better to advocate a substantial lowering of tax on low wage employees – a better method of improving incomes than relying on social handouts and welfare transfers. 

Both main parties need more courage and flair in formulating their policies. With only a few months left before electioneering starts in earnest, they have little time to find the right ingredients.

 

Social Finances

July 2008

The German Social Democrats (SPD), the oldest political party in Germany, have been undergoing change and losing members for years. Other parties are in a similar situation, but the SPD has been hit the hardest. Recent polls show its adherents are increasingly turning further to the Left, willing to vote for the radical Die Linke (“Left”) party. This emerged in 2007 from a merger of Linkspartei PDS, the renamed successor of the Communist SED, and WASG (“Labour and Social Justice – The Electoral Alternative”), founded by disenchanted Social Democrats in 2005. “Die Linke” has polled record scores of around 30 per cent in the Eastern German states. 

No-one can deny the success of the economic reforms launched by former Chancellor Gerhard Schröder. His policies on labour markets and social benefits, combined with corporate restructuring, helped prompt the economic upturn and lowered unemployment.  Both coalition partners are benefiting from these successes, leading to a relatively stable period of the Grand Coalition of the Conservative CDU with the SPD. Meanwhile, Social Democratic Finance Minister Peer Steinbrück can bask in the achievement of proclaiming a balanced budget for the first time in 40 years. This is the best way of sparing coming generations more debt and taxes. 

However, now that the elections of 2009 are starting to loom, the reform process has ground to a halt. While CDU and SPD are struggling with PR-slogans in education and social justice, everyone is shying away from any more fundamental ideas of how to reorganise the education and social systems to tackle the ticking demographic time bomb. The best way forward would be fundamentally to reform the benefit system, so as to start building up capital stock and reorganise education, especially in schools. This could best be done now, at a propitious time for politics and the SPD-led Finance Ministry. But, instead of this, most politicians speak out against any further fundamental reform for whatever reason.   

So the Germans will simply have to wait for another election before anything can change. The outcome may be either more Socialism or more Conservatism, unless another Grand Coalition emerges. If, on the other hand, the SPD revise their promise never to collaborate with “Die Linke”, a Red-Red coalition might become reality, supported by the Greens. Down that road would lie perdition for Germany.

 

The German Left's late triumph

March 2008

When East Germany was dissolved in 1989-90, the Communist Socialist Unity Party (SED) continued its existence. Despite attempts to dismantle the organisation, some persistent die-hards were able to save it and, most important, the party’s bank accounts. They first formed the PDS (Party of Democratic Socialism) as the successor of the SED, and later renamed themselves “Die Linke” (The Left), bringing in frustrated former SPD members who had formed their own party after the successful labour and social reforms of Chancellor Schröder and the Greens. The money, much of it from dubious sources, was never used to pay the East German citizens who had suffered under previous one-party rule. The SED and its direct successor were able to keep it.   

The well-filled bank accounts of the former East Germany Communist party left it  with full coffers for future elections, especially in the West. The personnel, well-trained in the East by  former governmental institutions, were expert at peddling populism to the leftwards fringes of German society.  

Now the SPD, lacking in profile and success among its traditional followers, is toying with the idea of joining forces with the former East German state party.  The recent Hamburg and Hesse elections left both larger parties in those states with too little power to form a new government by themselves. The SPD leader in Hesse Andrea Ypsilanti has been forced to turn to the Left  to gain votes for her own election as State Premier. This would be the first instance of  co-operation between the SPD and the Left in a west German state, after a similar coalition in Berlin. The grubby political manoeuvring keeps the headline writers happy. But it is not good news for German democracy.

 

European foreign policy - American elections

January 2008

Primary Elections are pointing towards an unusually high turnout in America. What can Europe expect?

Let us imagine that the new US President proclaims in January 2009 a “New Energy Policy Program” consisting of a 50% reduction in US oil imports by 2020. This would have a similarly impact to John. F. Kennedy’s announcement at the beginning of his presidency of the ambition to land a man on the Moon. 

Such an energy programme would commit an initial $ 100 billion research expenditure within the presidential tenure for transportation, energy alternatives, new resources, infrastructure and innovation. The recipients of the funding and tax incentives would be selected by a team of energy companies, technological experts from the transportation and building industries, high-ranking research and university representatives, and some politicians. Implementation on the consumer level would be supported by tax incentives for energy saving or innovative energy products. 

At the same time the US President would invite oil importing nations from  Europe and Japan to join his initiative. The emerging economies - India, China and so on – would also be asked to join on equal terms.  All this would be a surprise for Europe but it would have no choice but to join in. 

Let us imagine, too, the likely results of such a US initiative. If followed up jointly by the US and Europe, these could entail a substantially lower oil price, a boom in research and energy technology innovation, the replacement of outdated equipment and other major changes. Infrastructure innovation such as a potential “H2O Highway” (as announced by Linde recently) may start to become reality. 

With lower oil prices, we should experience a substantial change for the better in industrial performance, bringing a new economic boom – wrestling back international technological leadership into the hands of the industrialised countries, but also enabling a new partnership with the developing world. All this has geopolitical implications. International security problems with some of the oil producing nations might diminish over time, if the world’s dependency on oil is actually reduced substantially. 

These may be far-reaching visions. Let us hope they are not impossible dreams, but are capable of realisation!