"People never lie so much as after a hunt, during a war, or before an election," said Otto von Bismarck. Replacing the word "lie" with "stall" and this captures perfectly the effect the forthcoming federal election in Germany has had on policymaking towards the beleaguered southern states of the Eurozone. This election has been very convenient for the German political establishment as it has discouraged open discussions of options that might be unpalatable to German voters.
German policymakers--many of whom are amongst the most pro-European on the continent--have had to resort to double-talk and hard-to-spot technocratic initiatives to support struggling European partners. Earlier in the year, The Economist reported that Germany had begun quietly writing off its loans to Greece, essentially turning those loans into the very transfers that upset German voters.
Meanwhile, having convinced themselves that long holidays, generous welfare states, and rigid rules on firing employees are the causes of other nations' woes, the German people appear unwilling to countenance further support for Eurozone partners.
As the longest-serving head of a Eurozone government once said of economic reform "We all know what to do, we just don't know how to get re-elected after we've done it." Looking forward, the interesting question is what to expect after the election.
Of course, one advantage of stalling is to put off awkward decisions that may not be needed if circumstances change. In the present Eurozone, this amounts to hoping that something--anything--leads to a recovery in Greek, Spanish, Portuguese, Irish, and Italian growth. Such hopes were fed by optimistic forecasts by the IMF, the OECD, and the European Commission. The world economy has not obliged, however. Until recently, slow American economic growth held back the world economy. Now growth is slowing in the BRICs while the US economy is picking up. For crisis-hit European economies, while their trade deficits have fallen substantially, exports haven't risen fast enough to restore their economies to growth.
That the reform medicine isn't working--or at least isn't working fast enough--can no longer be denied and its consequences will generate headaches in Berlin after the election. Greek, Portuguese, and Irish government spending has been cut sharply, but the adverse economic impact has resulted in less taxes collected and government deficits remain stubbornly high. The only way that austerity programmes can be said to have "worked" is that they have created so much additional unemployment that wage growth has fallen behind productivity increases cutting unit labour costs, at least for a while. Now the IMF concedes that it underestimated the adverse impact of the latest austerity package that was imposed on Greece.
What will bring these matters to a head in the next 12 months is that sizeable government deficits that remain need to be financed and the private sector will be reluctant to provide more funds. Moreover, it is increasingly accepted that public debts in Greece, Portugal, and Ireland are now so high that debt restructuring will become necessary. For example, the hole in Greece's public finances over and above the deficit anticipated when its last bailout was drawn up, is expected by the IMF to be 4.4 billion euros in 2014 and 6.5 billion euros in 2015.
The trigger will be the IMF's rules, which forbid the release of more funds unless a country's fiscal plans for the coming year are fully financed. If Greece and others don't receive additional financial support from other Eurozone governments, then defaults loom and the financial market instability will return. Since cutting government spending produces such nasty side effects, all that is left is to cancel the repayment of some debt or pare interest paid on that debt. As the private sector now owns little Greek debt, then the IMF will insist that governments that lent money to Greece in the past accept losses. In plain terms, either Germany contributes to more bailouts or it suffers losses on its previous loans. Such is the fate of a creditor nation.
In sum, don't expect this election to be followed a shift in German policies. What Germany wants for the Eurozone the deficit countries reject and visa versa. This is a recipe for stalemate, which has been obscured in the run up to this convenient election. No doubt new means will be found to mask this fundamental divide on economic policy. Otto von Bismarck also said "Politics is the art of the possible, the attainable -- the art of the next best," and in this case, the next best is more of the same.Suggest a correction