German decisions on economy and the future of Europe

By Andreas Charalambous and Omiros Pissarides

Reports according to which the German economy is facing serious problems are increasing. In reality, however, despite the current sluggish growth, the country is characterised by a high standard of living, low unemployment, declining inflation and a progressive social welfare system.

Furthermore, Germany exhibits current account surpluses in its balance of payments, which reflect the competitiveness of its export sector, while the public sector is able to borrow at relatively low interest rates, reflecting market confidence in the resilience of its economy.

In addition, noteworthy progress is being observed in promoting renewable energy and reducing the country’s excessive dependence on natural gas imports from Russia, which is vital for Germany’s future prospects.

The main weaknesses concern the delay in the German industry’s ability to adapt to new technologies, as well as the bureaucracy that characterises government administration and decision-making processes.

With the above in mind, the discussions relating to a fiscal crisis in Germany seem to be exaggerated. They are based less so on actual data and more so on historical factors, specifically on the economic crisis after the second world war, which affects perceptions until today and explains what appears, to many observers, as an excessive aversion of the German public opinion to budget deficits.

Currently, Germany is confronted with decisions that will determine, to a substantial degree, its own as well as the future of the EU. The main issue is identifying a new equilibrium between, on the one hand, the need to ensure the long-term sustainability of public finances and, on the other hand, the requirement for a more proactive role of the state in terms of strengthening social cohesion, reversing climate change and bridging the technology gap with the US and China.

From a geopolitical perspective, the achievement of strategic autonomy in defence matters, the integration of neighbouring countries, such as the Balkan nations and Ukraine, into the EU institutional framework, as well as the elaboration of a policy framework for enhancing relations with third countries, including Turkey, the Middle East and North Africa, are of key significance.

Taking into account the accumulated experience from previous crises, the European Commission has presented a revised fiscal governance framework, which, among other things: (a) keeps the sustainability of public finances at the centre of its focus, but places it in a long-term context with the evolution of public debt as the main benchmark, (b) attaches particular importance to the implementation of public investments and reforms in the context of the supervision of member countries’ fiscal programmess and (c) provides for a strengthening of national ownership, by upgrading the role of domestic fiscal councils.

Germany and other countries have expressed strong reservations about the intended reforms, proposing instead to maintain a more rigid framework of quantitative targets, a practice which, historically, has been accompanied by an inability to adapt to changing conditions. They also oppose channelling more resources to the European Commission’s budget.

However, for Germany and the EU to be able to effectively respond to the current challenges, a reform of the existing fiscal framework is required. The compromise in principle agreement which was reached on December 20 by member countries is a first step in the right direction.

Andreas Charalambous and Omiros Pissarides are economists