The world's staunchest advocate of austerity is changing its tune.
German Chancellor Angela Merkel has agreed to a number of economic and social policy changes as part of a tentative deal reached between her conservative Christian Democratic Union and the centre-left Social Democrats to form a coalition government. The changes include an increase in stimulus spending, a lower age for pension eligibility and even the country's first minimum wage.
Such concessions would have been unthinkable at the height of the euro crisis, when Ms. Merkel was preaching a tough austerity diet for euro-zone partners overwhelmed by mountains of debt. But such measures deepened recessions, drove up unemployment and did even more fiscal damage across a wide swath of Europe.
"Austerity is losing credibility," says Marko Papic, managing editor of BCA Research's geopolitical strategy service in Montreal. And it has become "politically unsustainable" to keep a lid on public spending in the face of sluggish growth.
"If the country that has most vociferously supported austerity in Europe is now looking to spur domestic consumption and government investment, then others may follow suit," Mr. Papic said in a recent report.
The German political deal, reached after a marathon bargaining session, would take effect Dec. 17 with the swearing in of the Chancellor, provided the Social Democrats' 470,000 members approve it.
Ms. Merkel has committed to rent controls in some major cities, up to €2-billion ($2.9-billion) in added spending annually on transportation infrastructure, a highway toll on foreigners crossing the country and a reduction of the pension-qualification age to 63 from 67 for people who have made contributions for more than 45 years. But the centrepiece is a minimum hourly wage of €8.50.
The German minimum, which is lower than the Social Democrats had been seeking, will not be introduced until 2015 and won't take full effect before 2017. That leaves plenty of time for business to adjust.
The deal "may prompt some hopes of a more supportive stance towards the rest of the currency union," Jonathan Loynes, chief European economist with Capital Economics in London, said in a note. "But … the size of these measures is unlikely to fuel a substantial pickup in domestic demand."
None of the changes is likely to have any noticeable economic impact and will require neither tax increases nor additional debt. But they are notable nonetheless. The concessions affirm that despite their public anger over rebukes by Washington and Brussels of their handling of the economy, German policy makers realize they must shift away from their heavy export focus to a more balanced model that features higher domestic consumption.
That's one of the selling points of a national minimum wage (which will rank Germany below France but ahead of Britain, among the 21 European Union countries that have one). It comes at a time of heated debate over growing inequality in Canada, the U.S. and other countries, where the gap between the rich and everyone else has widened dramatically since the global financial crisis.
Employer groups and some economists claim such a move will lead to heavy job losses in eastern Germany, where about 25 per cent of workers earn less than the proposed minimum (compared with only about 10 per cent in western Germany). But others argue that the expected boost to purchasing power will offset slightly higher wage tabs, and that, in any case, German manufacturers relying on low-wage production have already moved to cheaper factories in Poland and the Czech Republic.
"On the margin, it's positive [for peripheral European exporters] that the German consumer is going to get more involved," Mr. Papic says. "Some of the [German] competitiveness is going to be lost. But not to a point where Germany will really suffer."