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POLITICAL ECONOMY
Walker's World: The German choice
by Martin Walker
Berlin (UPI) Nov 5, 2012


If she wins re-election, Merkel would join Helmut Kohl as one of the longest-serving German chancellors.

Politicians seldom like to deliver bad news, particularly when they face an election in the coming year. So congratulations to German Chancellor Angela Merkel for telling a regional party congress in Pomerania that they should expect the euro crisis to grind on "for another five years or more."

"We have to hold our breath for five years or more," Merkel warned delegates in Sternberg. "Whoever thinks this can be fixed in one or two years is wrong."

She is correct, of course, and those five years will see even more elderly Europeans collecting pensions and requiring costly healthcare while the unemployed youth after five years without a job will be even less employable than they are now.

It will require a most remarkable recovery after 2018 to make up for five more years of stagnation and austerity across Europe.

Indeed, conditions are likely to worsen, particularly in Germany, before they get better. The latest forecast from Deutsche Bank is deeply depressing.

"In the manufacturing industry the assessment of the current level of overall order books and the inventories of finished goods as well as expectations regarding future production, new orders and export volumes deteriorated. Even an optimist would be hard pressed to find hints of an economic stabilization during the winter half, which is still the consensus scenario for the eurozone," it says.

New orders from Germany's eurozone partners are 20 percent below their average level in 2007. Even though eurozone customers account for just more than one-third of German exports, they contain two-thirds of Germany's foreign investments so foreign earnings are also being squeezed.

Worse still, German factories are slowing. Capacity utilization is down 2.7 percent in the last quarter, which is persuading managers to cut back on investment plans.

"Despite the surprisingly buoyant mood of German consumers -- who so far are ignoring the weakening labor market -- the economy will be flirting with recession in the winter half, increasing downside risks to our 0.8 percent (gross domestic product) forecast for 2013," the Deutsche Bank analysis goes on.

The bank's analysts also see a steady rise in unemployment in Germany, perhaps just touching once again the politically important figure of 3 million, just as Merkel faces the voters in next year's federal election, scheduled for September or October.

If she wins re-election, Merkel would join Helmut Kohl as one of the longest-serving German chancellors. She would also consolidate her dominance of European politics and policy-making, which would mean that the grim years of austerity will continue.

Merkel is quite clear about this. In her speech in Sternberg predicting five more years of crisis she also said: "A lot of investors do not believe that we can keep our promises in Europe. We need a bit of strictness to convince the world that it is profitable to invest in Europe."

That will not go down well in Greece, Spain, Portugal and Italy, where the rising tide of unemployment is destabilizing politics. It may also be self-defeating, since even the International Monetary Fund is arguing that public spending cuts are doing more harm than good to hopes of economic growth. Merkel's key partner in Europe, French President Francois Hollande has put together a tactical coalition with Spain and Italy urging that Europe's focus instead should be on growth.

Merkel's response to the growth versus austerity argument should come Wednesday, when she is to address the European Parliament on "her thoughts on the further development of the Economic and Monetary Union."

While much of the rest of the world will be analyzing the results and implications of the presidential election in the United States, many Europeans will be paying just as much attention to Merkel's speech. It won't only chart her course for Europe's economic future over the coming five years but it could define whether the European Union continues to exist in its current form.

The fate of the euro remains in grave doubt, with Greece clearly needing another bailout and the renewed recession in Spain, Italy and France threatening new bond market and banking crises ahead. More fundamentally, the prospects of a Brexit, a British withdrawal from the European Union, are becoming serious. British Prime Minister David Cameron suffered a parliamentary defeat last week over his hopes to get some negotiating room over the coming EU budget.

A crucial two-day EU summit begins Nov. 24, at which negotiations over the European Union's 2014-20 budget are likely to dominate proceedings. Britain wants the trillion-euro budget frozen, if not cut, while France and most of the smaller countries (mostly net recipients from the budget) want it increased.

Merkel is torn, wanting a budget freeze but not wanting to join Britain in isolation, and at the same time she is deeply irritated by the various threats to veto the budget coming from Britain, France and Denmark.

That brings us back to her warning of five more years of economic crisis ahead. Those will be critical years for the European economy and thus for the new EU budget. The more Merkel warns of low growth and austerity ahead, the more her restive European partners will want more EU spending to ease the stony path ahead.

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