Merkel's pragmatic allies offer hope of new outlook

 

Young economists may show far greater flexibility in their reading of Germany’s economic rulebook

AMID THE twists and turns of the euro zone crisis, one of the few constants has been the apparent villain.

Whatever the latest plea – aid for Athens, eurobonds, greater European Central Bank (ECB) intervention – Germany has been cast as the pedantic nit-picker, afraid to permit political intervention in monetary policy because of its traumatic experience with hyperinflation.

In this narrative, Berlin is like the wide-eyed hysteric in every Hollywood disaster movie who refuses to respond to reason and endangers the rest of the cast. The underlying assumption is that, with its inflexible economic ideology, Berlin is holding the euro zone hostage to its own history.

Things look very different when you talk to economists in Berlin and Frankfurt. From bailouts to ECB bond-buying, the euro zone crisis has seen the slaughter of one German sacred cow after another.

“We’ve closed one eye after another, we’ve no eyes left,” joked one economist friend last week.

Even the Bundesbank, confident it had inculcated the ECB with its inflation-fighting, independent monetary tradition, has seen its influence weaken with every bond-buying intervention. That prompted the boardroom exit of Bundesbank president Axel Weber and ECB chief economist Jürgen Stark.

Their successors, Jens Weidmann and Jörg Asmussen, could play an interesting role in the crisis resolution – particularly if it involves a shift away from German economic absolutism.

At last week’s Euro Finance Week conference in Frankfurt, the two young economists were still singing in unison from the German crisis rulebook.

“Monetary policy cannot and will not be allowed solve the fiscal problems of states,” said Bundesbank president Jens Weidmann, the 43-year-old former economic adviser to Chancellor Angela Merkel.

The 45-year-old deputy finance minister Mr Asmussen – whom Vanity Fair described recently as “extremely fit and bald, but by choice rather than circumstance” – dubbed the budgetary debt brakes a “successful German export” across Europe.

For all their talk, however, the two soft-spoken forty-somethings belong to a younger generation of German economists for whom hyperinflation is less a raw emotional trauma than one experience of many that colour their understanding of Germany’s economic tradition.

The twin pillars of this tradition are the social market economy – wealth redistribution and a generous welfare state – and Ordnungspolitik, a German-style ordo-liberalism where free markets operate within a regulatory corset.

“These aren’t quaint traditions but a framework with which Germany has had very good experience in the last decades,” says a confidante of Merkel.

But there is palpable expectation in Germany that, on their watch, Asmussen and Weidmann may show far greater flexibility than their predecessors in their reading of Germany’s economic rulebook.

“The lessons of hyperinflation are never explicitly taught at university, there is no permanent gaze in the rear-view mirror, it’s just there as a part of Germany’s economic tradition,” says Dr Ferdinand Fichtner, chief economist at the German Institute for Economic Research (DIW) in Berlin.

“The younger generation of economists are far less ideological. The question is whether Asmussen and Weidmann can show economic flexibility without making themselves the subject of too much political influence.”

Many in Germany’s economist old guard fear the two 40-something economists have been changed – corrupted even – by their years in Berlin as euro zone fire-fighters for Dr Merkel and Dr Schäuble respectively.

“Weidmann is presenting the sombre Bundesbank image at the moment to counter critics who saw him as Merkel’s man, but he knows the political reality, too,” said one concerned former colleague.

“Asmussen is a political operator who is far likelier than his ECB predecessor to agree to bond-buying if he sees a chance for horse-trading on another front.”

While the prospect of a shift to a new economic pragmatism worries some in Germany, others see it as a natural development.

“This generation of economists doesn’t have to justify itself for anything,” said Prof Manfred Neumann of the University of Bonn, a former professor of Mr Weidmann.

“Jens is very polite and prefers taking partners to one side for a talk rather than the Weber method of banging on the table, which has been proven not to work.”

The rise of Weidmann and Asmussen comes as pressure builds for Berlin to contribute to resolving the euro zone crisis. Leading this process is an East German-born chancellor who sees the value of, but holds no sentimental attachment to, a West German economic tradition she never knew.

“A rash collectivisation of everything and everyone in Europe would calm markets in the short term,” said Dr Merkel last week. “But it would lead to a massive reduction in European competitiveness and I don’t want to be part of that.”

“It’s a well-known fact that I come from East Germany and, in 1990, I saw the chance to move into a competitive world,” she said.

For Dr Merkel, limited treaty change to allow EU budgetary supervision is the sugar-coating she needs to sell to her voters the bitter pill of greater ECB market intervention or even eurobonds.

Far from holding the euro zone hostage to its hyperinflation history, some German analysts see Merkel readying herself for a euro zone deal, aided by her two new pragmatic allies in Frankfurt.

“Pushing for a new euro zone regime of rules is exactly what was to be expected from Berlin,” said political analyst Jan Techau, director of the Carnegie Europe think tank in Brussels.

“What people don’t understand is that this package of rules is the political price Merkel needs for German concessions on the ECB.”