Red State

Hannelore Kraft, Germany's Debt Queen

Parteitag der nordrhein-westfälischen SPD
Hannelore Kraft, state premier of Northrhine Westphalia, contines at the helm of her party.
  • Why it matters

    Why it matters

    North-Rhine Westphalia is Germany’s most populous state and the popular state premier, Hannelore Kraft, had been spoken of as a possible future chancellor. However, she has presided over out-of-control deficits in a region that’s still reeling from losses to its coal and steel industries.

  • Facts

    Facts

    • North-Rhine Westphalia plans to take out €3.2 billion ($4.06 billion) in new debt in 2014 – more than any other state.
    • If Germany’s most populous state were an independent government, it would rank 17th among world economies.
    • By the end of August, the state collected €25.9 billion ($32.9 billion) in taxes, a €100 million year-on-year increase.
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    Audio

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Two years ago, Hannelore Kraft won 99.1 percent of delegate votes as head of the Social Democratic Party in North-Rhine Westphalia. When she sought re-election at the party assembly in Cologne on Saturday, it was clear that she had lost a little bit of her shine. The premier of the state, the most populous in Germany, still received 95.1 percent of the votes in the uncontested election – but attacks from opponents no longer simply roll off her back.

For example, the opposition Christian Democratic Union has been asking for weeks where Ms. Kraft was at the end of July, when two people died during flooding in Münster. The opposition wants to know why she did not immediately rush to the afflicted city. Her answer: She was on a ship in Brandenburg without mobile-phone reception. The “dead zone” controversy likely won’t catapult the CDU state party leader, Armin Laschet, to state premier. But recent headlines are proof that Ms. Kraft faces strong headwinds.

One big reason is the disappointing budget deficits her coalition government of the SPD and the Greens has presided over. This year alone, the state intends to take out €3.2 billion ($4.06 billion) in new debt. That’s more than in any other state in Germany. And it exceeds even the planned deficit for the entire federal government, if Berlin’s transfer of funds to the European Stability Mechanism is excluded.

“Growth has been strangled, and the budget has gotten out of control. ”

Christian Lindner, FDP leader

Christian Lindner, head of the Free Democratic Party at the national level and in the state parliament, already talks of four lost years in North-Rhine Westphalia since Ms. Kraft took office in 2010. “At the beginning, Hannelore Kraft fulfilled every wish of the Green Party and the large German trade union Verdi, in order to be popular,” he said. “Today growth has been strangled, and the budget has gotten out of control.”

If Ms. Kraft continues on her current path, Paris will soon be located on the Rhine, said Mr. Lindner, taking a poke at deficit governments in both France and his home state. The FDP leader, however, said he has little hope of a change in leadership. That would be an admission that Ms. Kraft’s French-inspired policies have failed totally, he said.

Is it all simply opposition rhetoric? The numbers tell the story. If Germany’s most populous state were an independent government, it would rank 17th among world economies – and it’s on the verge of financial ruin.

The SPD-Green coalition argues that a supplementary budget was needed not because of the government in Düsseldorf, but because of the state’s Constitutional Court in Münster. The court’s judges informed Ms. Kraft’s government that her plans to reduce officials’ pay was patched together so amateurishly that the only option was to cancel it. According to constitutionally valid rules in other German states, wage settlements for public employee unions do not automatically have to match pay packages for civil servants.

Parteitag der nordrhein-westfälischen SPD
Although under fire, Hannelore Kraft receives backing from her party colleagues. Source: DPA

 

Knowledgeable insiders, however, speculate that the judicial shipwreck might not have been so unwelcome to the state government in North-Rhine Westphalia. Higher salaries for civil servants are likely to win more votes than strict austerity measures.

In fact, North-Rhine Westphalia is benefiting from increased tax revenues, as is all of Germany. Through the end of August, North-Rhine Westphalia collected €25.9 billion, or about $32.9 billion in taxes. That’s €100 million more than the same period a year ago. At the same time, interest payments sank by 13.5 percent, with savings of €357 million.

Of course, the state still suffers from huge structural changes caused by deindustrialization. The area has long been steel and coal country, but those industries are no longer at the heart of Germany’s economy. Last year, the state’s economic output actually shrank slightly. Since 2005, the gross domestic product of North-Rhine Westphalia grew 9.4 percent – about two percentage points below the national average.

More than in almost any other German state, industry in North-Rhine Westphalia must find a way to deal with increasing costs of energy transition and liberalization of the electricity and gas markets.

On the one hand, the state’s energy production is still dependent on brown and anthracite coal, while only a little of Germany’s energy from renewable sources is produced in North-Rhine Westphalia. On the other hand, the state’s economy uses a great deal of gas and electricity, so rising energy costs weigh heavily on companies there.

It is all the more surprising then that Ms. Kraft doesn’t take a more robust role in the national debate over energy transition. Since the beginning of Chancellor Angela Merkel’s grand coalition government of Christian Democrats and Social Democrats last year, there has been little heard from Ms. Kraft in Berlin. Many Social Democrats say that’s just a matter of “demonstrative restraint.”

Axel Schrinner is a Handelsblatt editor and covers tax and financial politics. Thomas Sigmund is the head of the Handelsblatt Berlin office. Contact the authors: schrinner@handelsblatt.com and sigmund@handelsblatt.com.

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