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The effect of the European Central Bank’s policies on Germany’s economic wellbeing is now coming under sharp criticism both outside and inside the Federal Republic. Abroad, these policies are being held responsible for having weakened the euro to the point where it – by way of booming exports – gave Germany all-time record foreign trade and current-account BoP surpluses last year, to the tune of 8.1% of gross domestic product. Actually, this has had much to do with German engineering prowess and impressive productivity gains and the German leadership points out correctly that it has virtually no influence on the euro’s exchange rate. But the critics, not least among them the new US Government, hold that the 2016 surplus in goods exchanges of EUR 252.9 billion was racked up along with a buildup of debt in other countries and, thus, poses a risk to the global economy. The German authorities have an obligation, so they say, to spend more to boost domestic demand, especially as Berlin has just posted its largest budget surplus since reunification in 1991.

At home, the complaints focus on the notion that European Central Bank policies suitable for the Eurozone as a whole are too lose for Germany. They subsidize profligate Southern European governments, so one hears, force up asset prices, and accelerate inflation in general – a nasty bugbear for Germans, who still have memories of the historic destruction of money during the Weimar Republic buried deeply in their national genes. Sabine Lautenschlaeger, a German who sits on the ECB’s six-member executive board, may have been genuinely pleased to be able to report that Eurozone inflation in January ticked up to 1.8% (German inflation was 1.7% in December, increased from 0.7% in November). The ECB’s goal is to hold inflation just below 2% per annum, a target it has been undershooting since early 2013. But her “frankly, I am delighted about that” was not well received by much of the local press, which had headlines screaming “Easy to Say If Your Wallet Is Full” and “Pensioners Will Be Particularly Hard Hit.”

Most of Germany’s leading politicians have been calling for the ECB to put an end to its massive bond-purchase program known as “quantitative easing.” This is not about to happen, and the issue will be a major topic in the runup to the Federal elections on September 24. All in all, the country is in fine shape economically. Real GDP growth hit 1.9% in 2016, the best gain in five years. An advance of 1.6%-1.7% looks likely for 2017. Unemployment is at the lowest level since the start of the data series in January 1992 and the number of people at work is at its highest since reunification in 1990. Exports, too, have been hitting records and the national minimum wage has just been hiked to EUR 8.84 an hour from EUR 8.50. With this on her record, one might assume that Chancellor Angela Merkel should be able to cruise to a fourth term in office. But many in the Federal Republic have not been happy with the way things have been going. Germany today offers less social mobility and a growing inequality, they say. Many worry about job security, given the increasing prevalence of fixed-term contracts. Many view the trend toward more & more automation as threatening, and with large numbers of women working short hours on little pay, a growing proportion of the workforce is earning low wages.

This is grist for the mills of the Center-Left Social Democrats, whose recently anointed leader, Martin Schulz has made criticism of the “Agenda 2010” a focus of his rather successful efforts to lift the party’s spirits and poll ratings. A former President of the European Parliament, Herr Schulz insists that this set of labor policies, introduced by one of the SPD’s former heads (ex-Chancellor Gerhard Schroeder), has gone too far in the direction of liberalization and that a tightening-up is needed to bring social justice. The SPD also wants to raise taxes “on the rich” and delve deep into environmental issues. Under Schulz’s stewardship, the Social Democrats, who are in government in a grand coalition with Mrs. Merkel’s CDU/CSU, have gained a lot of ground. The most recent opinion polls actually give them a lead, the first in more than a decade. Mrs. Merkel, moreover, is under pressure not only from the Left of the political spectrum, but also from the Right. The growing force there is the Alternative Fuer Deutschland (Alternative for Germany or AfD), a Right-wing, Eurosceptic party that has seen its popularity surge in opposition to the Chancellor’s liberal refugee policies.

The AfD’s populist platform appears to have secured it a place in the Bundestag (support has jumped from 4.7% in the 2013 elections to 12%-15% now). Still, it will not be able to nudge Chancellor Merkel from her strong pro-EU position and her defense of open borders, globalization and international trade. She will hold fast in principle, although there is now public concern in many corners about the influx of 1.2 million migrants who are proving difficult (and in many cases unwilling) to integrate and the Chancellor has just issued a 16-point plan to modify her approach. The SPD does not share the AfD’s anti-refugee stance either, judging from Mr. Schulz’s remark that the Alternative is “a disgrace to the Federal Republic” and it is “shameful and repugnant” when “rat-catchers are trying to make political capital on the backs of the refugees.” When all is said and done, Chancellor Merkel’s chances of winning a fourth term at the helm of the CDU/CSU are still pretty good, assuming that there will be no further, major terrorist incident in Germany between now and September.

But Mr. Schulz and the SPD appear to have at least an outside chance of bumping her from her position if they keep gaining ground the way they have been doing. It is significant in this context that Frank Walter Steinmeier, the former Foreign Minister and a top SPD figure, has just been elected as Germany’s new President (a largely ceremonial post, but not quite as powerless as it may appear at first glance). To be sure, even if the SPD came in first in the Fall elections it would almost certainly lack an overall majority and have to forge a coalition with other parties to be able to govern. This could mean a renewal of the grand coalition with the CDU/CSU, but with the SPD in charge for the first time, or an attempt to build a Center-Left government with the Greens and the Far-Left Party. Quite possibly, in such an event, the incoming government would be composed of three different parties, something Germany has not experienced before at the national level. But Berlin’s commitment to the European Union and the euro will remain strong either way.

Global Perspectives by Dr. Hans Belcsak