February 7, 2018 / 2:21 PM / in 17 days

Merkel loosens purse strings and embraces Europe to keep power

BERLIN (Reuters) - To secure a fourth term as chancellor, Angela Merkel is handing her Social Democrat (SPD) coalition partners control of the finance ministry, giving them license to spend a record budget surplus, and embracing their demands for European reform.

Giving up the powerful ministry to the center-left SPD is a particularly strong signal to Germany’s euro zone partners, many of whom endured austerity championed by Wolfgang Schaeuble, finance minister in the previous government.

“Symbolically, it is quite big,” said Carsten Nickel, managing director at consultancy Teneo Intelligence.

“The language will be different and I think the language can make a difference, specifically in France - but substance, I think, is still a different conversation.”

SPD leader Martin Schulz has styled the coalition agreement on Europe as “an end of forced austerity” - a pitch designed to appeal to his party’s 464,000 members before they vote on the deal and decide on their third ‘grand coalition’ with Merkel since 2005.

While the deal still stresses Germany’s commitment to the EU’s strict budget rules, it also calls for the euro zone’s ESM bailout fund to be turned into a full-blown European Monetary Fund, and for funding to shield the euro zone from crises; Schulz said the prospective EMF would become a significant instrument for EU financing.

The agreement was welcomed by senior EU officials, who will also greet the prospect of Germany using the fruits of its robust economic growth to increase domestic government spending - a move other EU capitals have long called for.

SPENDING SPLURGE

According to a draft of the coalition agreement seen by Reuters on Wednesday, the next government sees additional fiscal space of 46 billion euros ($58 billion) over the next four years to increase investments and reduce taxes as Germany’s strong economic upswing pushes up revenues and the budget surplus.

Still, a splurge as planned in the coalition draft would have been harder to imagine with a finance ministry under Schaeuble, renowned for his laser-like focus on budgetary rigour.

“Do not underestimate the impact of the SPD getting the influential finance ministry,” said Commerzbank chief economist Joerg Kraemer.

“This marks a huge change from the policy of Wolfgang Schaeuble regarding European integration, transfer of risks toward the peripheral countries.”

Schulz said the key point was that the government was prepared to put more into the EU budget.

The next finance minister is likely to be Hamburg mayor Olaf Scholz, a down-to-earth figure and keen advocate of European integration who has been critical of Merkel’s euro zone policy in the past.

Schulz, who is set to take over the foreign ministry, has boasted about his telephone conversations with French President Emmanuel Macron, and wants to work with Paris to champion “a better and fairer Europe”.

Macron was elected last May on a promise to overhaul the EU, and has called for a euro zone budget to help the bloc cope with external economic shocks, and for closer cooperation on defense and migration.

Even though the coalition deal takes a markedly positive tone on Europe, there may be more scepticism in the lower house of parliament, the Bundestag, which ultimately controls fiscal and euro zone policy.

Guntram Wolff, director of the Bruegel think tank, said the coalition deal was “not a game-changer”.

“Opinions in the Bundestag, if anything, have become more skeptical on Europe and the majority they (the coalition parties) have now is much smaller,” he added.

FISCAL ANGST

The far-right Alternative for Germany (AfD), which surged into parliament in the Sept. 24 election with almost 13 percent of the vote, opposes euro zone rescues and spending by the ESM.

Some conservatives in Merkel’s bloc also fear that rushing ahead with European integration would cost German taxpayers dear; former European Central Bank chief economist Otmar Issing called the coalition blueprint “a farewell to the idea of an EU aimed at stability”.

That fiscal angst in Merkel’s bloc risks feeding tensions between the coalition partners, who only renewed the alliance they embarked on in 2013 after she failed to form a government with two smaller parties after September’s national election.

The drawn-out coalition haggling, resulting in Wednesday’s deal, has turned many voters off the SPD and the conservative bloc of Merkel’s Christian Democrats and their Bavarian sister party, the CSU.

An Insa poll on Monday had support for the SPD dropping to 17 percent, below its election result of 20.5 percent. The conservatives slipped to 30.5 percent, suggesting there might be no majority for a grand coalition if an election were held now.

Merkel, who decided to seek a fourth term only after long reflection, must be careful not to compromise too much with the SPD as her party slowly starts to look ahead to potential successors.

The succession debate has been supercharged by the inclusion of a clause in the coalition deal that envisages a review of the new government’s progress after two years to assess whether any changes to its mission are needed.

“All three parties come out of the election and the long negotiations looking fragile,” Bruegel’s Wolff said.

Additional reporting by Michael Nienaber and Julien Ponthus; Editing by Kevin Liffey

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