The end of Little Germany?

Atlong last, Germany is ready to swear in a new government. After fivemonths of political wrangling, the Social Democrats (SPD) and theChristian Democratic Union – together with the CDU’s Bavarian sisterparty, the Christian Social Union – have formed a government coalition.But in the process of reaching that agreement, something has shifted inGerman political debate.Germany has long enjoyed the luxury ofpretending to be something it is not: a small country. At the time ofthe election last year, there was hardly any public debate about theEuropean Union and Germany’s role in it. Chancellor Angela Merkel’sthen-comfortable lead in opinion polls confirmed her instinct thatGerman voters did not want to be bothered with discussions aboutEurope’s future. And, despite being the former president of the EuropeanParliament, then-SPD leader Martin Schulz also focused almost entirelyon domestic issues.But the election of US President Donald Trump,the reform agenda of French President Emmanuel Macron, and, to a lesserextent, the United Kingdom’s vote to leave the EU, have focused mindsacross Germany. If Europe is to meet its many challenges, Germany needsto question some of its longstanding assumptions. It needs a clearEuropean agenda, one that dispenses with small-nation thinking.To besure, Germany’s historical narratives and political preferences limitthe options available to any government. But there are still realisticsteps that the incoming German government can take to serve the Europeanand global good. Will the new coalition be up to the task?TheEurope chapter in the coalition agreement between CDU/CSU and the SPDhas been framed in Germany as an answer to Macron’s eurozone reformproposals. But those who were hoping for a fundamental change ineconomic policy will likely be disappointed. The new government mighttalk about restarting the EU’s Franco-German engine of reform, but it isunlikely to support proposals for debt mutualisation or the creation ofa sizeable common budget.But it can and should pursue othermeasures. Germany could accept – and even promote – the idea that fiscalpolicy should be more counter-cyclical at the national level. It shouldalso stop dragging its feet on the eurozone banking union and make thecapital markets union a high political priority. It could make a boldoffer on European deposit insurance and a common fiscal backstop for theEurozone’s Single Resolution Fund, which steps in when banks collapseand are wound up. It could tie that offer to a thorough clean-up of theEuropean banking system, especially in Italy, and to tough rules oncreditor bail-ins.Germany must also tackle its large savingssurplus, which is unbefitting Europe’s largest economy. To boostconsumption, low-income earners need to be relieved of their excessivelyhigh tax burden. Germany’s labour-market institutions leave manyservice workers without much bargaining power or protection, therebycreating one of the largest low-wage sectors in Europe. German saverscould also do with a low-fee public wealth fund, which could boostequity investments both in Germany and across borders, while reducingGerman demand for international safe assets.With the financeministry in SPD hands, a greater emphasis on public investment, ratherthan tax cuts and further reductions in public debt, has also become apossibility. Germans are beginning to grow tired of the decade-longideology-driven pursuit of lower deficits. The country’s constitutionalfiscal rule, known as the debt brake, does allow for higher publicspending. Slight economic overheating as a result of higher private andpublic investment would help boost wages and import demand, which mighthelp reduce Germany’s current-account surplus.The new Germangovernment should also develop a new trade policy that recognises and iswilling to use the country’s economic clout, and that of the EU, morestrategically. The increasingly protectionist tone of the Trumpadministration presents a perfect opportunity for Germany to step intothe breach. The US will soon impose tariffs on all steel and aluminiumimports, and this requires a firm European response.It is notablethat the German debate about the US-EU Transatlantic Trade andInvestment Partnership was focused primarily on consumer rights andprotecting domestic regulations and standards. But narrow economic goalssuch as these, to which a small country would give priority, no longersuffice for today’s German neo-hegemon. The same is true of overlyoptimistic support for a form of trade multilateralism that has largelyrun its course.Instead, the incoming German government needs todevelop a trade policy that supports economic reforms and socialstandards, while promoting market economics and the rule of law in itsneighbourhood. Germany could also be doing more to push the rest ofEurope to be more forceful at the World Trade Organisation on socialrights, environmental protection, fair taxation, and improved politicalstandards.These proposals require German politicians to shift thedebate. As the eurozone’s dominant country, Germany needs to make surethat the bloc benefits all of its members and is a stabilising force inthe world economy. Germany must finally start thinking of itself as themajor economic player it is, and behave accordingly – preferably beforenew ministers settle into old routines. – Project Syndicate* Sophia Besch is a research fellow at the Center for European Reform.Germansecretary-general of the Christian Democratic Union (CDU) AnnegretKramp-Karrenbauer walks past a poster featuring German Chancellor AngelaMerkel after addressing a press conference following a leadershipmeeting at the party’s headquarters in Berlin on Monday. The SocialDemocrats party (SPD) agreed the day before to join a new coalition withChancellor Angela Merkel’s conservatives CDU, heralding an end to thepolitical stalemate that has plagued Europe’s biggest economy sinceSeptember’s inconclusive elections.