By Bob Dannhauser, CFA
Germany may not be the force that sees the European Union through its political and economic strains, according to Kai Konrad, director of the Max Planck Institute for Tax Law and Public Finance in Munich. At the Sixth Annual CFA Institute European Investment Conference, Konrad painted a picture of troubled states increasingly doubtful of the union's ability to join in stronger coordination of structural policies, not least because of the wariness of the more robust states toward bailouts and mounting liability risks. This combination of "austerity fatigue" and "rescue fatigue" might very well conspire to create a dark future for the eurozone.
Konrad's discussion of "austerity fatigue" centered around the well-known sluggishness of many economies in the region but also focused on the less widely acknowledged toll taken on national psyches by external reform pressure. Referencing the Pew Research Center's May 2013 poll of attitudes within eurozone countries, Konrad cited the majority of respondents in Southern Europe who felt that economic integration had weakened their economies, noting a precipitous drop in support for a more integrated European economy since 2009, in the aftermath of the global crisis. Germany alone had an increase between 2009 and 2013 in the percentage of respondents who felt that economic integration has a positive long-run effect on their home economy. Austerity for the good of the union is increasingly a political liability in many parts of the eurozone.
Even among more robust European economies, the sentiment for support of integration has weakened in the last few years; Konrad suggested that this "rescue fatigue" ought not be surprising in the face of bailout requests and potential transfer unions. Konrad noted the heated debates over the relatively modest net redistributions in the upcoming year's EU budget, and he predicts far more vehement opposition if the full scale of transfers (which he estimates at some 20 times the current redistribution) were to be realized.
Konrad then addressed the notion of Germany playing a central role in solidifying the European Union, cautioning against outsized expectations. Germany's current account surplus is not a recent phenomenon, and Konrad noted that the advantage conveyed from the European economic integration is but one factor contributing to the surplus. Moreover, Konrad showed how GDP-per-capita growth in Germany has actually lagged since integration - European Central Bank data identify median household wealth as among the lowest in the eurozone, and mean household wealth data convey only a slightly less compelling view. Thus, populist pressures within Germany to avoid further burdens for addressing its neighbors' economic woes are understandable, especially given their experience devoting resources to transfers from West to East Germany, only to have divergence persist with per capita GDP in the former East remaining at about 70% of the former West. In Konrad's words, "don't expect much from Germany."
Konrad closed with a sobering assessment of the eurozone's prospects, citing the lack of willingness to integrate further and leveling special criticism against a new compliance regime of budgeting rules for member states, which he characterized as unlikely to be followed unless it was strictly in the interests of each state. Konrad sees the disintegration of the monetary union as a possibility, but as his presentation illuminated, the pressures that might eventually give rise to such a situation are a complex stew of populist fervor, fiscal realities and governance mechanisms that so far have failed to bridge the gaps among member interests.
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