Saturday, May 18, 2024
 
 

Will the new German coalition lead Europe towards a federal union with room for common debts?

Incoming German Chancellor Olaf Scholz.

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Outgoing German Chancellor Angela Merkel recently celebrated the end of her 16-year term in office in Berlin with a traditional military band playing hits from Hildegard Knef to Nina Hagen.

To what extent the new coalition of Social Democrats, Liberals and Greens will set the pace in the EU remains to be seen. The coalition agreement contains some controversial provisions: the EU is to develop into a federal state in accordance with the principles of subsidiarity and proportionality; a constitutional convention is to prepare amendments to the EU-treaty on the basis of an ongoing debate about the future of Europe, and the unanimity rule in the EU’s common foreign and security policy is to be dropped. 

These announcements will trigger stiff resistance from the EU’s newer Eastern European members, nearly all of which flatly reject the idea of giving more power to the European Union’s bureaucratic institutions. Whether there can be a further federalization of the EU will depend to a greater extent on the outcome of the 2022 presidential elections in France.

In France, and most of Southern Europe, the new government in Berlin is expected to further soften the EU’s strict Stability and Growth Pact, which was suspended because of the Corona pandemic. For the new German Chancellor Olaf Scholz, common debts are a condition for the creation of a so-called “United States of Europe”. The Free Democratic Party (FDP) leader, and new finance minister, Christian Lindner, has always spoken out sharply against a federalized Europe, but as the new finance minister, he is already more than willing to compromise on the matter. Germany, in Lindner’s opinion, must ensure stability. 

“We have a responsibility to ensure that this currency area (the Eurozone) stays together; that there is an investment in other countries and that there is political stability,” said Lindner.

In Lindner’s view, Germany cannot behave like one of the “Frugal 5” European nations – Denmark, Finland, the Netherlands, Austria and Sweden – which categorically reject a common EU debt and any change to the euro debt rules.

France and Italy are pushing for the 807 billion Corona aid pot to be developed into a permanent EU investment budget – financed by debt that is ultimately paid for by future taxpayers, above all, Germans. The coalition agreement avoids making any commitments on these issues. This is not surprising, since the election programs of the FDP on one side, and the Social Democrat Party (SDP) and the Greens on the other, represent opposing positions. 

The Liberals have warned against a debt union and a softening of the Stability Pact. The Greens and SPD, however, have stressed the need for more state investment. They advocate changes to the pact and a permanent EU pot for investment.

In the coalition agreement, a compromise was reached that reconciles both positions: “The Stability and Growth Pact has proven its flexibility … On that basis, we want to ensure growth, maintain debt sustainability and provide for sustainable and climate-friendly investment. The further development of fiscal policy rules should be guided by these objectives to strengthen their effectiveness in the face of the challenges of the times.”

“This is a classic formulaic compromise that leaves the door wide open for a softening of the Stability and Growth Pact,” complains Markus Ferber from the Christian Social Union in Bavaria (CSU). Ferber also represents the Christian Democrat EPP Group in the European Parliament’s Economic and Monetary Affairs Committee.

Austrian economist Gabriel Felbermayr, head of the Institute for Economic Research, believes that omitting proposals in the government program for reforming the Eurozone could prevent a new euro debt crisis as interest rates continue to rise. 

“This is a problem, because the coalition program could force monetary policy to act. If the promised investment boom comes up against the realities of an ageing society and pervasive shortages, then there is a threat of overheating with inflationary tendencies across Europe.”

Important for the EU’s near future is the new German government’s course on the rule of law vis-à-vis Poland and Hungary. European Commission President Ursula von der Leyen has frozen billions in aid to both countries from the Corona reconstruction fund and attached conditions to them if they’re to be reinstated. She also sent a letter to Warsaw and Budapest as part of a first salvo that could lead to the freezing of regular budget funds. 

Germany’s coalition parties, however, suspect that she might be making a rotten compromise. That is why another sentence in the coalition agreement is of important significance in terms of its enforcement: “If preconditions, such as an independent judiciary, are secured”. In fact, the states have the last word before any money can flow. 

The first counterattacks have already come from Poland’s Justice Minister Zbigniew Ziobro, leader of the small party “United Poland”, who accused the German government of wanting to “become the disciplinarian” of the EU, which Poland will never accept.

The German satirist Martin Sonneborn, a member of the European Parliament since 2014, does not believe that Scholz will deviate too far from his predecessor’s approach, saying, “I expect that the interests of the German economy will continue to be put before the interests of the other 26 members of the EU.”

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