G20 Headache

Merkel Against the World

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Preparing for a display of German strength at the G20 summit in Australia.
  • Why it matters

    Why it matters

    Germany is considered Europe’s growth engine. World leaders are pushing for the continent’s largest economy to do more to stem the slide.

  • Facts

    Facts

    • Germany’s economy grew by just 0.1 percent in the third quarter of this year after contracting 0.1 percent in the second quarter.
    • The G20’s leaders will set a target of increasing global growth by 2 percent in five years.
    • German Finance Minister Wolfgang Schäuble recently announced a €10 billion investment package to take effect in 2016.
  • Audio

    Audio

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For German Chancellor Angela Merkel, a trip to New Zealand on Friday will be the only relaxing part of her weekend journey to the land down under.

Ms. Merkel and Prime Minister John Key traveled to Motutapu Island to visit a sanctuary for kiwis, the national symbol of New Zealand. She released a female kiwi bird into the wild.

It was a little diversion before the chancellor continued on to Australia, where she was to be confronted by global leaders who are expected to be far less welcoming. The leaders of the world’s 20 leading industrialized nations and emerging economies are meeting in Brisbane this weekend for the latest G20 summit.

It’s looking again like it will be Ms. Merkel against the world.

“Budgets need to be further consolidated. That message is important to us.”

Government Official, Berlin

Ms. Merkel and her advisers had actually hoped this summit would be different, that the repeated calls for Germany to take more steps to pull Europe out of its growth doldrums might have eased by now. After all, Ms. Merkel can for once offer her fellow world leaders some good news.

Finance Minister Wolfgang Schäuble just last week announced a €10 billion ($12.5 billion) investment package, which will take effect in 2016. The package will mark Germany’s contribution to a new G20 target to increase global growth by a total of 2 percent over the next five years.

News that Germany and Europe have escaped another recession also allowed Ms. Merkel to breathe easier during the summit – but only a little. Europe’s largest economy grew by an anemic 0.1 percent in the third quarter of this year, after contracting 0.1 percent in the previous three months.

Germany’s households are buying goods at a good pace, while exports are also rising again, the statistics agency Destatis said. These developments come despite the uncertain geopolitical situation stemming from a crisis between the Ukraine and Russia.

So far, the 18-nation euro zone has also avoided falling into its third recession since the 2008 financial crisis. The currency bloc grew by 0.2 percent in the third quarter, the Brussels-based agency Eurostat said Friday, after France in particular posted better growth numbers for the July-September period than expected.

 

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German Chancellor Angela Merkel discussing options with New Zealand Prime Minister John Key. Source: BPA/Action Press

 

Berlin had viewed its €10-billion investment package as a signal for world leaders that Germany is willing to do its part for growth, particularly as they expect the promised public investment will be followed by private investment. “We also brought this to the G20,” a senior government official said. “Germany is leading the way by setting a good example.”

Apparently, this message isn’t having the desired effect on Germany’s G20 partners. Once again, a few fellow world leaders have been zeroing in on the chancellor and her fiscal policy before the summit even began.

U.S. Treasury Secretary Jack Lew said it is critical that countries with fiscal leeway, such as Germany and the Netherlands, become more active in raising Europe’s meager economic growth rate. Otherwise, the continent could face a “lost decade.”

U.S. diplomats suggested that Mr. Lew only mentioned the Dutch to be polite; he was mainly referring to the German government.

The G20 target is a PR move more than anything else.

Washington is not alone. The International Monetary Fund will submit a report to the G20 leaders that warns of the risks of an even stronger economic downturn in the 18-country euro zone.

Politicians in Berlin have now realized with some resignation that the German investment package is being viewed as too little and too late. The U.S. government, the IMF and others fixated on preaching growth measures can no longer be convinced, Berlin officials opined.

Ms. Merkel’s critics want nothing less than for Berlin to give up its promise of a debt-free budget next year, which would be a first for Germany since the 1960s.

The U.S. government doesn’t believe that Germany’s pledge to issue no new debt in 2015, a plan that lawmakers will present in Berlin on Friday, is proof of a sound policy. In fact, they consider it a serious mistake.

The German government will not be swayed. In Brisbane, Ms. Merkel will be doing more than just defend the balanced budget – she will go on the attack. In her statements, the chancellor will urge the other countries to pursue the same budgetary discipline that Germany has shown, according to government sources.

 

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G20 leaders will be getting down to business over the weekend. Source: Reuters

 

“Budgets need to be further consolidated,” a government official said. “That message is important to us.” The German mantra is that an expansive fiscal and monetary policy can “conceal the problems, but it can’t solve them.”

The host of the summit, Australian Prime Minister Tony Abbott, wants to make sure that the dispute over the right mix of austerity and growth policy doesn’t escalate. A number – 2 percent – will help him achieve his goal.

“As leaders we are duty-bound to address such problems. It is our job, individually and collectively,” Mr. Abbott said in an op-ed for Handelsblatt.

A 2-percent increase in growth sounds good, and it’s a message all the G20 countries can support. There is every indication that the negotiations over the G20’s final communiqué at the end of the weekend will be far more amicable than the public accusations by Mr. Lew and others would suggest.

The negotiators who hammer out the text on behalf of the world leaders, known as the sherpas, are already almost finished with their work, as Handelsblatt has learned from government sources. Berlin also no longer has any objection to the 2 percent goal, with officials saying that they support the plan.

This is partly because the target is a PR move more than anything else. To achieve an additional 2 percent in growth over the next five years, all additional measures governments have taken since 2013 will be included. Ms. Merkel and Mr. Schäuble have simply told the Australians about a number of programs already agreed by the country’s governing coalition, which is made up of Ms. Merkel’s Christian Democrats and the left-leaning Social Democrats.

Other countries have taken similar approaches. In other words, each country is therefore delivering what it had already planned. It’s no surprise that it didn’t take the G20 countries long to compile the list of 1,000 measures that will be included in the final document.

It’s difficult to monitor whether all of these promises will be kept, which is probably why there is only a global target of 2 percent – and no targets for the individual countries. But it does offer all sides an opportunity to leave the G20 summit peacefully on Sunday – at least until the next meeting.

 

Christopher Cermak spent six years working in Washington and attending G20 summits before joining the Handelsblatt Global Edition in Berlin. Jan Hildebrand is Handelsblatt’s chief political correspondent in Berlin and Thomas Sigmund is the managing editor of Handelsblatt’s political and economic section. To contact the authors: cermak@handelsblatt.com, sigmund@handelsblatt.com and hildebrand@handelsblatt.com

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