GERMANY: Managing Covid-19 (and a looming European crisis)

Carsten Nickel

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● Despite the challenges of the country’s decentralized decision-making system, authorities have managed to deal relatively well with the Covid-19 crisis so far.

● But strong public support for the government’s consensual crisis management should not be misread as providing political credit that could quickly be spent on divisive “coronabonds.”

● If market pressure on Eurozone members forces a debate over debt mutualization, Berlin’s condition would likely be much stricter fiscal policy centralization.

 


Testing capabilities have been ramped up substantially, which seems to have enabled the relatively quick isolation of infected people. As the rate of new infections is still rising, however, the number of available hospital beds and intensive care units has also been increased significantly. The government has been quick in rolling out its economic response measures and keeps fine-tuning them to ensure wide-spread coverage.

As a result, public support for Chancellor Angela Merkel and her grand coalition government’s handling of the crisis is strong. Moreover, the 25 April conference to elect a new leader for Merkel’s Christian Democrats (CDU) has been canceled. Furthermore, the crisis has benefitted successor candidates with pragmatic credentials and executive track records, such as North Rhine Westphalia’s state premier Armin Laschet and, especially, his Bavarian counterpart Markus Soeder.

Merkel to the rescue?

The relative calm in domestic politics might also explain why in much of the commentary on Berlin’s positioning on the European stage, a familiar theme from previous years of Eurozone crisis-fighting is resurfacing: a focus on Chancellor Angela Merkel personally. Towards the end of her tenure, her (yet again) solid domestic standing seems to raise hopes that Merkel could almost unilaterally override North European reservations against greater risk and burden-sharing in the Eurozone – i.e., the introduction of “coronabonds.”

In reality, however, Germany’s decentralized political system and the grand coalition force the government into consensual crisis responses. As a result, the current emergency is not a politically contested topic. That sets it apart from episodes such as the migration crisis, where Merkel’s choice of pro-European solutions led to a severe political pushback. In the Covid-19 emergency, the chancellor – and the German political center in general – are only just about to recover from such previous, much more politically charged crises.

Northern political pressures

A conversation about debt mutualization in Europe would look much less like the Coivd-19 emergency and much more like the migration crisis in domestic politics. There is no reason to assume that there would suddenly be parliamentary support for measures that have been hugely divisive in German politics over the previous decade. Recall that the far-right AfD first emerged in protest against Merkel’s Eurozone policies – its self-stylization as an “Alternative” still points to Merkel’s claims then that there was no other option but to bail-out southern member states.

This reflects a broader problem. Dutch Finance Minister Wopke Hoekstra’s (indeed unhelpful) criticism of Italy has been met with a mix of condemnation and warnings of a southern backlash against a lack of European solidarity. But in the coming months, it will be crucial to remember that northern decision-makers face their own domestic political pressures, pulling them in a direction opposite to their southern peers (in the Dutch case, this means the presence of two major Euroskeptic parties). For Germany and the north, jumping from the virus crisis directly to debt mutualization will simply not work politically – especially as long as there is no immediately visible problem with sovereign financing.

Exit strategies matter

Two broad misconceptions hence seem to exist. The first is that (northern) domestic politics could somehow be circumvented in this crisis. In reality, individual countries would probably have to face questions over their Eurozone membership first. This might look like overly reactive short-termism, on the one hand. On the other, it is merely the result of the (protracted and messy) logic of democratic politics. Without these politics, a significant next step in European integration such as debt mutualization will hardly materialize. There are serious concerns over the euro’s political viability if the south does not receive enough support. But it is unrealistic to imply that for this reason, northern political constraints could somehow stand back.

One consequence is that the exit from the current measures will be crucial. Germany and its allies might try to quickly withdraw current economic support measures once the crisis is over, further aggravating Eurozone imbalances. German dependence on European demand should motivate a more benevolent stance; yet, the very flipside of this export dependence is a strongly institutionalized preference for competitiveness and sound public finances. These are the political trade-offs that have so far hardly been addressed in the north, as the European Central Bank does all the heavy lifting. But they will have to be fought out (and won) before the next major integration step can occur.

It takes two

Closely related to the first misconception is a second one: the idea that the key to the Eurozone’s future lies with Merkel personally or in Germany alone. The implicit idea in much of the commentary seems to be that, in contrast to loans from the ESM rescue fund, debt mutualization would be condition-free. But this is politically as unrealistic today as it was during the Eurozone crisis.

If the euro were to come under such pressure that debt mutualization would become unavoidable, Germany would probably give up its resistance, but under one condition: that a new institutional architecture be designed, providing from the European level the economic and fiscal credibility the northerners have been missing in Italy over recent years of ultra-low interest rates. In other words, debt mutualization would mean the return of Hoekstra’s comments, just in a more technical variant. Its flipside would be permanent conditionality via more centralized fiscal policymaking.

The political desirability of such a regime will be a big question to answer for Germany the north – but certainly also for the south.