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Chirol
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Chirol

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November 26th, 2005

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Bundeskanzlerin Merkel

While the media discuss important matters like how to translate the femnine ending on Bundeskanzerlin Merkel, Bill Rice over at Dawn’s Early Light has a post up on his predictions regarding Germany. Bill always has strikingly good analysis and not only that, his forecasts seem to come true more often than not. However, with regard to Germany, I’d like to add a few qualifiers. Here’s why:

Will Merkel be another Bismarck?

The parallels to be found here are rather in similar circumstances. Bismarck, Chancellor of Prussia, was faced with a strong France to the west and Russia to the east. Germany had long been a weak collection of divided states, something that France intentionally promoted to protect its own power and to use as a barrier against the Russians. Bismarck was faced with powerful neighbors, empires at that, and a weak collection of German states. His genius came in carefully manipulating the German states while keeping his neighbors calm through an extense series of treaties all designed to allow Germany’s peaceful unification and rise as a major European power.

Merkel is also faced with a weak and divided Germany, however in a different sense. The economy has gotten progressively worse and despite the occasional good news which is overhyped in the German media, the situation is not improving. Schröder got the ball rolling on reforms but at the same time created a great deal of social unrest and division. As his reforms continued to alienate voters and his failure to improve Germany’s economy since 1998 reinforced this discontent, his government could no longer use anti-Americanism to distract voters from their dire domestic problems and new elections had to be called.

As Bill noted, Merkel left Germany almost immediately after being sworn, sending a strong message to the world about what her foreign policy will look like. Actually, I rather see this as what it won’t look like. Bill notes,

Visiting NATO headquarters in Brussels was a strong indicator of Ms. Merkel’s desire to strengthen ties with America and reaffirm the Atlantic Alliance as the primary guarantor of Europe. This was deft, because it didn’t require a meeting with an American counterpart.

[...] Her meeting with PM Tony Blair left her with plenty of flexibility in future dealings over EU budgets and policy directions, including the Common Agriculture Policy (CAP) and the continental loathed British rebate that make up the major economic stumbling blocks.

[...] However, her visiting France first in the tour showed the French respect and keeps her options open for future negotiations in Europe.

Thus, Merkel must rebalance Germany’s foreign policy, distancing herself somewhat from France and Russia while moving towards England and the United States. The key to her trip wasn’t the individual meetings, but that she’s busy creating more room to maneuver. Don’t read too much into this, German foreign policy will merely move back towards the center and stay there. This trip is about rebalancing German foreign policy so she doesn’t have to spend so much time on it. Expect Merkel’s administration to be concentrated on domestic problems and stay on the fence internationally. Domestic reforms can’t be postponed any longer.

Lastly, Bismarck essentially ran Germany himself despite the existance of the Kaiser and Reichstag and he didn’t hesitate to illegally sideline the Reichstag to get things done or to come into direct conflict with Kaiser Wilhelm over matters of policy, as Bismarck won almost every time. Half of Merkel’s government belongs to the SPD, including ministries key to reform like Labor and Health. The grand coalition came dangerously close to failing and after two months of negotiatons, Germany’s future was agreed upon giving her very little flexibility domestically unlike Bismarck.

The CDU’s goal is to deliver reforms that make concrete differences in the life of everyday Germans while slowly gaining the support of the center elements of the SPD and not alienating them in foreign policy issues. This would eventually allow the CDU to gain a real majority in the next elections, likely partner with the FDP and move on to the more radical reforms necessary. Despite the differences between Bismarck and Merkel, she is faced with a similar task and as Bill wrote, only time will tell how she deals with it.

Comments to this entry

IJ
November 26, 2005
4:28 pm
It is suggested that the priority of the new German Chancellor will be domestic reforms to reduce the nation's unemployment rate of 11%. The previous administration in Germany tried to do the same thing: "Schröder got the ball rolling on reforms but at the same time created a great deal of social unrest and division. As his reforms continued to alienate voters and his failure to improve Germany's economy since 1998 reinforced this discontent. . . new elections had to be called."

Any government who cuts public expenditure risks its chances of re-election. In looking for guidance, it is worth "investigating":http://www.moneyweek.com/article/416/investing/commodities/north-sea-oil.html how the UK government improved its economy many years ago:

*Did North Sea oil make Thatcherism possible?*
Some commentators think so. The money that flowed into the Treasury's coffers was crucial to enabling the Government to bear the cost of rising unemployment. Some economists believe that, without North Sea oil, the Thatcher Government might have been forced to abandon the strict monetarist economic policies that caused interest rates to rise to punitive levels in the early 1980s, and to scale back Thatcher's confrontation with the unions and privatisation programme, both of which contributed to soaring unemployment.
IJ
November 26, 2005
9:21 pm
Complaints about Germany's economy are many, however its performance has been "impressive":http://www.opinion.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2005/09/05/do0502.xml&sSheet=/opinion/2005/09/05/ixopinion.html.

In order to improve it further, a couple of months ago Merkel's proposed finance minister, tax guru Paul Kirchoff, said he wanted a 25 per cent flat tax and the abolition of 90,000 tax rules. "We will smash down the tax barriers, break the cycle of resignation. I'll be there myself on hand with a big sledge-hammer." But these ideas were unpopular - in fact they almost cost Merkel the election - and Herr Kirchoff bowed out.

And generally on reform of the public sector: "Germany, Holland, Denmark, Sweden, Austria, Belgium and Spain - not to mention the flat-tax fire-breathers Poland, Slovakia and the Baltics - have all starved the public sector over the past decade, while Britain swells ever fatter. Our state will take 45 per cent of GDP by 2006, against 46 per cent for Germany, on OECD data. It does not take much extrapolation to see that Britain could soon be Europe's sick man again, gasping and choking with the worst of the big-government sclerotics."
Chirol
November 26, 2005
10:21 pm
Interesing link. I've heard of this proposal but that's exactly what it is, a proposal. Considering the current sales tax is already 16%, 25 wouldn't make enough of a difference to make up for the revenue loss. And even if, there would be a great deal of moral opposition to this because the poorer would be taxed the same as the rich.
Kirk H. Sowell
November 26, 2005
11:22 pm
It would never occur to me to compare Merkel with Bismark. Aside from the differences Chirol mentioned, Bismark was a leader who commanded respect. Or put more simply, Bismark was a leader. Merkel's leadership of the CDU has been incredibly lackluster, and that is even before being in power and having to make tough choices. Without a more charismatic leader, I don't see the CDU going anywhere absent a sea-change in Germany public opinion, since the three left-wing parties (including the ex-communist Left Party) beat the two right-wing parties by about 7-8%. The fact that 25% in the East voted for the former communists is incredible.

As to Germany's economy, I think one must make a distinction between the health of Germany's commercial sector and the economy as a whole. Germany has many very good companies with solid profits, and this is why Germany has more exports than anyone. But the "economy" includes not only these great companies with their highly productive workers but a huge number of hangers-on who in various forms depend on the state. I think that may be why there are sometimes positive indicators but when we look six months to a year later, overall economic growth is still crawling along.
mark safranski
November 27, 2005
12:52 am
Overall, a nice post. One point of contention:

Chirol wrote:

"His genius came in carefully manipulating the German states while keeping his neighbors calm through an extense series of treaties all designed to allow Germany's peaceful unification and rise as a major European power."

Well - peaceful except for the three wars Bismarck started with Denmark, The Hapsburg Empire and France where he smashed all of his enemies ;o)

I'll give you genius though along with the intelligence to see war as a tool of statecraft for specific, rational, ends and once the war was over, Bismarck knew how to be a relatively gracious winner who asked for reasonable terms from the loser that took into account the vital interests of third parties. Yes, France lost Alsace-Lorraine but most Alsatians were really Germans anyway.

As for Kirk Sowell's point, Bismarck was *not* respected or well liked when he first became Prussian chancellor since a majority of the Diet were liberals. Even the King didn't like him particularly so much that he realized that Bismarck would fight doggedly for the King's prrogatives. Bismarck however, made himself indispensible to the king and outmanuvered his parliamentary rivals.
IJ
November 27, 2005
11:28 am
The priority for Germany's economy, according to this "article":http://www.boston.com/news/globe/editorial_opinion/editorials/articles/2005/11/27/merkels_difficult_hand/?p1=MEWell_Pos4 in the US press today is to increase its domestic consumption. The country is perhaps too dependent on its massive exports; oil producing countries have a similar problem. But it's a fair point.

It is a little surprising, though, to see how little credit is given in the article to Germany's plans to reduce the federal deficit. The protection of taxpayers, with financial discipline in the EU (S&G Pact), is a big cultural difference between the EU and the US.
Grendel
November 27, 2005
9:43 pm
It is a little surprising, though, to see how little credit is given in the article to Germany's plans to reduce the federal deficit. The protection of taxpayers, with financial discipline in the EU (S&G Pact), is a big cultural difference between the EU and the US.

Cmiiw, under the Clinton administration clever fiscal policies lead to a admirably long economic development and a balanced budget, even with a surplus. It was different under recent Republican rule, just to mention Reagan and Bush senior. I'm not surprised his son is no better, but it's a sad record that the 300 bill. mark has been surpassed. In Germany, it's the socialdemocrats who have the image of being overly generous and the conservatives who balance the budget when it's their turn. In reality, if you look at the numbers, both only managed to increase the deficit over the past decades. The EU Pact with its 3% ceiling is important for the Eurozone, ignoring it again and again is dangerous for the whole group if individual members notice that they can relax and ignore common sense to not spend more than they earn.
IJ
November 27, 2005
10:50 pm
You're right Grendal. Fiscal stewardship in the United States is seriously lacking - a couple of years ago, when the deficit was much smaller, the IMF called it "a threat to the global economy":http://www.commondreams.org/headlines04/0108-02.htm. However the difficulty is in enforcing this 'rule set' to ensure stability in the global economy.

In Europe, at least the EU has learned from mistakes in the past and introduced a reasonably effective arrangement - but the S&G Pact is a WIP. This is highlighting the attitudes of the EU and the US towards both their taxpayers and the global economy.
mark safranski
November 28, 2005
12:41 am
" It was different under recent Republican rule, just to mention Reagan and Bush senior."

Sorry, no.

Actually, with the exception of a less than one year mild recession in 1992, Reagan through Clinton represents a 17 year GDP anf job expansion for the United States. (Reagan's peak growth rate was slightly higher than Clinton's BTW. He also inherited a far more dire economic position than ol' Bill did. Clinton however, should get credit for shifting gears and maximizing econ opportunities)

Bush II however has econ policies unlike either man, tax cuts notwithstanding.
Grendel
November 28, 2005
9:08 am
Sorry, no.

Sorry, yes-aha.

Deficit budgets took off with Reagan and Bush 1.0 and were more or less stable in the decades before, Clinton altered course and Bush 2.0 painted the town red (expression from leo.org, don't kill the messenger ;-) ). You are talking about economic expansion, I concentrated on the deficit. In this respect, George W. Bush is a failure. The economy is booming though, but much of it has been build at the expense of the future.

p.s.: This post will probably keep a certain white house page on top of this Google "result":http://www.google.com/search?q=bush%20failure&hl=en list... ;-)
Grendel
November 28, 2005
9:11 am
p.p.s: I forgot to include a link about what the "U.S. Department of the Treasury":http://www.publicdebt.treas.gov/opd/opdhisto4.htm has to say about the deficit.
mark safranski
November 29, 2005
1:57 am
Sorry, no - again.

The degree to which deficits matter is always relative to other variables - such as Real GDP growth, inflation, the prime rate and so on.

To look at deficits from a strictly static perspective is to argue that the mammoth deficits acquired while fighting WWII ( many times the size of the GDP) should have destroyed the American economy. Obviously, they did not which puts current budget deficits at 6% of GDP into perspective.

A static deficit and a shrinking Real GDP ( as happened with Carter circa '79) is *not* a better economic situation than a growing deficit that is outpaced by the growth in Real GDP. Economic growth that is " lost" in a given year is money lost for good, including the future benefits that would have otherwise accrued from having had a higher Real GDP in a given base year.

Moreover, a deficit that remains static only because inflation is boosting large numbers of taxpayers into higher tax brackets ( again Carter) is actually worse than it appears both in Real terms and in terms of ripple effects from depreciating the currency affecting aggregate investor behavior.

Deficits of course matter - but only in context and not out of it ;o)
IJ
November 29, 2005
9:06 am
There is of course a big cultural difference between the European Union and the United States; essentially the governances have different levels of respect for their taxpayers and the global economy. Can the gap be narrowed?

For example, one way forward is to have enforceable global rule sets (IMF?); however reining in the colossal twin deficits will be difficult in the US - certainly in the short term. But if global rule sets cannot be enforced in the US this sets a bad example for the rest of the world.
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