Beware of German finance ministers bearing gifts. Olaf Scholz’s announcement last week that Germany is ready to consider EU-wide deposit insurance is important, but his proposals are not quite what they seem.
Also, beware of the reported shift of German views on fiscal policy. It is true that more German economists are coming out in favour of a fiscal stimulus plan. Some are even beginning to criticise the 10-year-old constitutional balanced budget rule, the deep reason behind the country’s large fiscal surpluses. If you only read the headlines, it might appear that Germany is finally beginning to shift its views on financial and fiscal policy. But don’t forget to read the small print.
On deposit insurance, I detect a shift in strategy, but not yet in substance. During his time as finance minister Wolfgang Schäuble insisted that Germany would not even talk about EU-wide deposit insurance unless and until the risks in the banking system had been reduced. He also wanted the EU to end the practice that banks could load up with their home country’s sovereign bonds without attaching any risk weights to those investments.
Mr Scholz’s position is substantively the same, with one important difference: he is ready to negotiate without preconditions. The non-paper he published last week, shows that he wants a serious discussion. But the red lines are unchanged.
There are many obstacles to the idea. Italy has less to gain from an EU-wide deposit insurance than it would lose from giving up the zero risk weights. The Dutch agree with the Germans on financial risk reduction but disagree with another German demand — to harmonise the corporate tax base.
Also, do not assume that Mr Scholz has the backing of his coalition. Chancellor Angela Merkel welcomed Mr Scholz’s position as a contribution to a discussion. It is not government policy. The biggest domestic opposition is likely to come from the influential savings banks — the Sparkassen.
While I can discern a shift on deposit insurance, I see none whatsoever on fiscal policy. Ms Merkel only last week reiterated her party’s red line — the fiscal position must either be in balance or in surplus, a combination known in German as “the black zero”. With a 2018 fiscal surplus of 1.9 per cent of gross domestic product there is some leeway, but most of that will be used up by the automatic fiscal stabilisers and the recently agreed climate package.
The opposition to a discretionary fiscal stimulus is massive within Ms Merkel’s Christian Democratic Union. The Social Democrats (SPD), especially Mr Scholz, are also fiscal conservatives. Some, but not all, are open to a fiscal stimulus during recessions.
The background to much of the discussion is Mr Scholz’s candidacy for the vacant job of SPD chairman. The proposal on deposit insurance brings him the support of the party’s pro-European wing. His opposition to more defence spending is popular on the left; his fiscal conservatism endears him to the right.
In the last week of November, SPD members will choose between two competing pairs of candidates. Mr Scholz’s running mate is Klara Geywitz, an east German politician. They compete against Norbert Walter-Borjans and Saskia Esken, from the left of the party. That vote will have a bearing on another big decision by the SPD — on the future of the grand coalition. If SPD members vote for the Scholz/Geywitz ticket, they will indirectly keep Ms Merkel and Mr Scholz in their government jobs. If not, there could be elections in the spring.
Ms Merkel is, for now, not interfering with what CDU folk consider unwelcome policy discussions from a junior coalition partner. It will be interesting to see how much of this will survive if the SPD chooses to extend the coalition.
While I am sceptical about short-term breakthroughs, I am more optimistic that Germany adopts different policies on the eurozone in the long run.
The Greens are likely to be a member of the next government. They have made the useful proposal to add a sustainable investment rule to the constitutional balanced budget requirement. The idea is to ensure that deficit cutting does not happen at the expense of public sector investment.
This is not a formal, technical change. It would make for a more expansionary fiscal policy on average. The Greens will also demand more public investment to help Germany meet agreed climate targets. I see no substantial shifts in fiscal policies unless and until the Greens enter into a coalition. The most probable scenario would be a coalition with the CDU and Christian Social Union.
This is ultimately the irony about Mr Scholz’s belated discovery of the eurozone’s deficient governance as a political theme: if his ideas ever see the light of day, then it will most likely be without him and his party in power.