Germany’s election: What next?

Angela Merkel’s convincing victory in Sunday’s election will have profound ramifications on Germany’s – and Europe’s – competitiveness in coming years. It means that Germany is likely to continue its push for budgetary consolidation at home and abroad, coupled with demands for reform and modernization.

For Europe in the short term, Merkel’s victory will assure citizens, entrepreneurs, investors and financial markets that there will not be a U-turn on policies that are the fruit of years of painstaking negotiations. In the long term, it will make reform and budget consolidation a way of life, thereby increasing the chances that Europe can one day emerge from the crisis with renewed growth and confidence. Five years into what some fear will be a lost decade, this is a welcome prospect.

Looking ahead, we can expect that the so-called Competitiveness Contracts – legally binding agreements between the European Commission and the member states – are now likely to become a reality. These Competitiveness Contracts will be ratified by national parliaments, thereby giving more domestic buy-in and legitimacy to the agreed reforms and less of a feeling that they are a diktat from Brussels.

In exchange, it’s probable that Germany will discuss the establishment of a “solidarity fund” that would see money channelled to poorer countries based on their track record of implementing reforms. The fund will be used as an incentive to implement reforms, because the member states that do best will receive the most money. This is in stark contrast to other schemes, particularly the EU regional funds, which essentially punish countries for successful economic development by cutting off money once they reach a certain threshold of prosperity and wealth – thereby providing justification to perpetuate poor economic performance as a way to sustain subsidies.

Politically, the Competitiveness Contracts and solidarity fund are of paramount importance to the functioning of the European Monetary Union. Transfers from wealthy to poorer regions are an essential element of successful monetary systems – think of the money that is channelled from wealthier US states to poorer ones – and we are now seeing the kernels of a new, revamped structure that institutionalizes a key requirement of an optimal currency union.

With the Competitiveness Contracts scheduled to be on the agenda at the December European Council, and in view of a possible third Greek bailout, there is no time to waste. At last, there is the prospect of marrying the macroeconomic stabilization efforts that have dominated the headlines with the necessary microeconomic reforms and adjustments that are necessary to drive innovation, productivity, growth and employment.

Domestically, the biggest threat for Germany is complacency, taking its success for granted and forgetting what turned around its economic fortunes. It is worth remembering that, only 10 years ago, Germany was considered the “sick man of Europe” with eroding international competitiveness, sky-high unemployment and unsustainable public finances. Contrary to today, Germany was a key force behind the watering down of budgetary consolidation efforts, in particular the Stability and Growth Pact – a fateful decision that opened the door to high deficits and unsustainable debt and a grave mistake for which Europe is still paying a high price.

The Social Democratic Party (SPD) is likely to be Chancellor Merkel’s partner in a grand coalition. Anyone fearful of the SPD’s commitment to reform should recall that many of the policy changes that led to Germany’s spectacular economic recovery in recent years were initiated by Gerhard Schröder, Merkel’s predecessor, as a member of the SPD. Merkel and the SPD are likely to have an overwhelming majority in Parliament, and also a joint understanding that today’s economic prowess and international competitiveness is a hard-earned process that must be continued each and every day.

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Author: Ann Mettler is executive director of the Lisbon Council, a Brussels-based think tank, and member of the World Economic Forum’s Global Agenda Council on Europe.

Image: German flags are seen in front of the Reichstag building in Berlin REUTERS/Wolfgang Rattay.