From The Asset (Hong Kong), January 20:
The transition to new German leadership after 16 years under Chancellor Angela Merkel will not change the country's core political priorities vis-à-vis Europe. Preserving the eurozone will remain paramount, even if it means suspending Germany's traditional opposition to fiscal stimulus and deficits
Armin Laschet’s victory in the election to lead Germany’s Christian Democratic Union (CDU) puts him in pole position to succeed Chancellor Angela Merkel later this year. But the leadership contest was more about differences in tone and style than substance. From a policy standpoint, it makes no difference.
Currently the minister-president of North Rhine-Westphalia, Germany’s most populous state, Laschet will maintain Merkel’s policies to keep the eurozone together. His competitor for the post, Friedrich Merz, would have done the same, notwithstanding his more conservative temperament. Continuity will be the watchword of the post-Merkel period.
During Merkel’s 16-year tenure, holding the euro together has become a key political imperative for Germany. The response to the Covid-19 pandemic has shown that Germany’s leadership will do almost anything to prevent Italy from leaving the single currency. Not only has Germany agreed to a 750 billion euro (US$910 billion) EU recovery fund and the issuance of joint debt (through a quasi-Eurobond); it also may agree to pursue additional fiscal stimulus, even if it has to again suspend its “black zero” rule against budget deficits.
After all, Italy and other southern eurozone economies simply will not be able to tolerate a steadily appreciating euro for an extended time. The Germans abandoned austerity during the Merkel era but it is a kind of “backdoor austerity” to forgo a fiscal stimulus with a declining economy and rising currency. Something will now have to give, and it won’t be the euro. It will be Germany’s traditional opposition to fiscal stimulus....
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