Germany’s Free Democratic Party (FDP) labels itself “liberal” in the classic, Adam Smith sense of the word – that the invisible hand of economic forces should rule with as little interference from government as possible. But for at least one big institutional investor, they may be a bit too liberal.
The FDP’s failing? It wants to take the European Union treaties at their word and prevent Germany and other members from bailing out Greece or any other southern European country that runs into trouble.
The German capital market strategist for BlackRock, the world’s biggest asset management firm, sees this as a problem if the FDP wins enough votes in this month’s election to become the coalition partner of choice for Chancellor Angela Merkel’s Christian Democrats.
“The goal of the FDP is to achieve stability in Europe. It is grotesque to claim that financial markets will be destabilized with more public policy measures.”
“I’m concerned that there could be a strong reaction in the bond markets if the FDP in a government coalition should push through demands for a literal fulfillment of the fiscal pact or even an expulsion of Greece,” BlackRock’s Martin Lück told Reuters after first raising his concerns in an interview with Süddeutsche Zeitung.
Spreads – the difference in yields between German bonds and those of riskier countries – would widen, Mr. Lück said, and make it difficult for these countries to refinance their debt. This could lead to a new crisis in the euro zone.
And in fact it is part of the FDP campaign platform that Germany stick to the letter of the law regarding bailouts. FDP leader Christian Lindner has spoken in favor of Greece temporarily leaving the euro. “We Free Democrats want to strengthen the No Bailout clause anchored in European law,” the platform says in a section called “Stick to the Rules.” The platform further recommends changes in the EU treaties to allow countries to exit the euro without having to leave the EU.
Mr. Lück isn’t the only one concerned. “These stances would make German economists happy. But they would hardly improve the euro zone,” ING chief economist Carsten Brzeski wrote in an editorial for Handelsblatt Global at the end of last month.
But the reaction from the party to Mr. Lück’s warning was one of indignation. “This assessment is out of touch with reality,” the FDP’s Volker Wissing told Handelsblatt. “The goal of the FDP is to achieve stability in Europe. It is grotesque to claim that financial markets will be destabilized with more public policy measures.” Mr. Wissing is responsible for financial policy in the FDP’s executive committee.
There is some irony in the fact that Germany’s pro-business party should be attacked by one of the world’s biggest capitalist institutions. But Mr. Lück may simply be talking BlackRock’s book. The firm reported $5.7 trillion of assets under management as of June 30. Among other things, it is the world’s largest provider of exchange-traded funds through its iShares subsidiary, and many of the indexes embedded in these passive funds will include bonds of Italy and other southern European countries that might be impacted by widening spreads.
Another possible factor: BlackRock’s CEO, Larry Fink, is well-known to be left-leaning among Wall Street denizens. He was a longtime supporter of Hillary Clinton in her political ambitions and was widely considered her choice for Treasury secretary if she had won the presidential election in November.
In any case, BlackRock is probably more worried about the fate of Greek or Italian bonds than the average German voter. By contrast, the FDP calls for dropping the pretense that these bailouts are saving Greece rather than the investors holding the bonds. Inside and outside of Germany, the FDP stance has a lot of supporters.
When the euro zone countries, including Germany, reached the latest €8.5-billion bailout deal for Greece in June, the Bloomberg editorial board condemned it as “unserious.”
“This protracted game of ‘extend and pretend’ serves nobody’s long-term interests,” the editorialists said, “not those of the Greek government, the International Monetary Fund or, most of all, the people of Greece.”
Despite his worries, Mr. Lück believes it is likelier Ms. Merkel will form a new grand coalition with the Social Democrats rather than take on the contentious FDP. This would give Berlin more flexibility in dealing with Europe, and especially with France under its new president, since the Social Democrats have already gone along with Ms. Merkel’s more moderate course.
The FDP would need a strong showing in the election to present itself as a coalition partner, and would have to get a double-digit result to insist on its hardline stance regarding bailouts, Mr. Lück believes. Recent polling has the party steady between 8 and 9 percent, as the four smaller parties vie for third place behind the Christian Democrats, polling in a range 36 to 38 percent, and the Social Democrats, who have fallen below 25 percent. For a CDU-FDP coalition to come into effect, the two parties would need 50 percent of seats in the new parliament.
An FDP deputy in the European Parliament was quick to take BlackRock to task for interjecting itself into the German campaign. “That an American Wall Street giant publicly offers something like a recommendation for German parliamentary elections is a dangerous novelty in election year 2017,” Michael Theurer wrote in an op-ed for Handelsblatt.
Noting that BlackRock’s assets under management exceed the GDP of Germany, Mr. Theurer went on to denounce the growing power of financial firms, upending the traditional role of finance to serve the real economy. “The power relationship is turned upside down,” he wrote. “Business and industry should now serve Wall Street or the City of London. That is not acceptable.”
Dana Heide is a Handelsblatt reporter in Berlin. Darrell Delamaide is a writer and editor for Handelsblatt Global in Washington, DC. To contact the authors: email@example.com and firstname.lastname@example.org