Judging by various media and research reports over the last few weeks, many observers seem to believe that the German line on austerity has hardened over the last month or two. In our view, this is wrong. Instead, Berlin has cautiously made its stance a little more flexible.
Of course, German rightly insists that crisis countries must meet the conditions to be eligible for support. Berlin refutes all public demands that the Eurozone must change tack in any major way. And on Cyprus, Germany indeed took a tough line. Without alleged “Russian money launderers” taking a major hit, the German Bundestag would not have approved any support package for the small island with its oversized financial sector.
But as often in life, we should look beyond the obvious headlines. Step by step, Brussels is granting one Eurozone country after the other more time to meet fiscal targets. We have heard hardly any serious protest from Berlin against that. The maturity of support loans for Portugal and Ireland have been extended by seven years. Even in Greece, the troika is taking a less controversial approach, emphasising more the huge progress which Athens has made and scaling down its demands for immediate action on those few policy issues where Greece is behind (although the Greek parliament will have to approve some action now before the next two tranches of €2.8bn and €6.6bn can be released). German is quietly encouraging French president Hollande to go for more serious labour market reforms, suggesting that such reforms matter more than simple austerity.
All in all, Berlin seems to acknowledge that the euro periphery (but not France) has made serious progress. In response, the German emphasis is shifting a bit away from short-term austerity to longer-term structural reforms. Ahead of the German election on 22 September, Berlin has a prime interest in (i) visible progress in the Eurozone and (ii) the absence of dramatic tensions. The result seems to be an approach that is pragmatic and flexible without changing the overall direction by much. It certainly is not a harder line.