May 7 (Bloomberg) -- The red brick tower of the state archive in Duisburg soars 250 feet above an old inland shipping port on the River Rhine, a statement of intent that Germany’s most populous region is willing to pay for.
Four times over budget, the converted warehouse project in the former coal-and-steel state of North Rhine-Westphalia is a showcase for the determination of Hannelore Kraft, the region’s Social Democratic leader, to buck the national rush to balance budgets espoused by Chancellor Angela Merkel.
As Merkel pushes her anti-debt message during campaigning for this month’s European Parliament elections, Kraft’s defiance marks her out as the leader of German states seeking largess from the central government. What’s more, as a Social Democrat untainted by Merkel’s grand coalition with her party, Kraft can position herself as Merkel’s main adversary, boosting her standing as a potential candidate for chancellor in 2017.
“People in Europe are watching Kraft with great interest because she’s the only politician in Germany who seems to be a match for Merkel,” Shada Islam, a director at the Friends of Europe policy-advisory group in Brussels, said today by phone. “She may be expressing the silent wishes of many in Europe who have chafed under Merkel’s agenda of spending cuts.”
The division was public as recently as two days ago, when Merkel used a campaign appearance in Ingolstadt, the home of carmaker Audi AG, to praise the regional Bavarian government’s lead in “paying down its debt.” Similarly, Finance Minister Wolfgang Schaeuble’s budget for 2014-2015 shows the federal government, which already has the European Union’s lowest borrowing costs, is ensuring “we’ll no longer have to borrow new debt,” she said.
“That has to be our goal for Europe as well,” Merkel told a rally of supporters of her Christian Democratic Union in front of the city hall, parts of which from the 14th century.
Kraft’s message to North Rhine-Westphalia sounds very different. “We won’t save the state to death,” she said in an e-mailed response to questions.
Kraft, 52, the daughter of a streetcar driver and a ticket collector, is leveraging her region’s legacy as a Social Democratic stronghold and its political power with an economy bigger than Switzerland’s to tangle with Merkel and her Christian Democrats. Social Democrats have run the western German region of 17.6 million people, which includes the Ruhr Valley industrial heartland, for 45 of the last 58 years.
This year, Kraft’s government plans record spending of 62 billion euros ($85 billion) while trimming the deficit by a quarter to 2.4 billion euros. Eight of Germany’s other 15 states already ran a budget surplus last year, complying early with the legally mandated deficit ban, known in Germany as a “debt brake,” that Merkel and the Social Democrats enacted during her first term in 2009, a year before Kraft gained power.
“Taking on the federal government on behalf of North Rhine-Westphalia and other states gives Kraft a lead role in a rough fight,” said Arthur Benz, a political scientist at the Technical University of Darmstadt. “She’s free to stage an open protest against Merkel” and Schaeuble.
Economists now single out North Rhine-Westphalia, with its high welfare costs, above-average business taxes and a squeeze on local infrastructure spending, as the German state most likely to struggle to meet debt limits. Kraft’s government hasn’t presented detailed spending cuts to meet the 2020 deadline and her region “remains a source of concern,” the Cologne-base IW economic institute said in a report in December.
That makes Kraft’s state the make-or-break test of the fiscal rigor that Merkel made her hallmark policy in Germany and across Europe during the euro area’s debt crisis, sparking protests and vilification in countries from Ireland to Greece. A flavor of that revolt might now be coming to Germany.
“I foresee growing tension between the states and the federal government,” Ralph Bruegelmann, an IW economist, said in an interview. “The states will press the federal government to run up debt or increase taxes.” Nine of the 16 states are run by the Social Democrats.
Kraft’s position as the totem for austerity-resistant states is helped by her party’s acquiescence at national level. Economy Minister Sigmar Gabriel, the SPD chairman who steered the party into a coalition with Merkel and became vice chancellor, has welcomed the push to end deficits, saying it “should make us all happy.”
From her base in the state capital of Dusseldorf on the Rhine, Kraft can build up her credentials even though she currently isn’t voicing ambitions for top national office.
The role isn’t new for Kraft. She criticized Merkel’s austerity prescription during the debt crisis, led a state government tolerated by the anti-capitalist Left party and flirted with opposing national SPD leaders who opted to join Merkel as junior partner for the second time in December.
Her stance on finances may now stir up unrest among other cash-strapped German states as they face the constitutional cap on new borrowing that Merkel touts as a model for Europe.
“I get angry when I hear people call us a source of concern,” the state’s finance minister, Norbert Walter-Borjans, said in a phone interview. “We will fulfill the debt brake,” though “we won’t enter into a simple-minded race for the prize of who gets to zero first.”
Kraft’s government points to the legacy costs of the state’s industrial past. Other spending decisions haven’t helped, such as the conversion of the red-brick grain warehouse into the library in Duisburg, where the jobless rate of 13.8 percent in March was nearly double the national average.
Turning the landmark into Germany’s biggest archive required bricking up the windows to keep the interior dark and building the tower to house documents that date back to 821 -- just seven years after the death of Charlemagne, the first European emperor since Roman times, at his palace in Aachen in present-day North Rhine-Westphalia.
Standard & Poor’s still affirmed the state’s stable AA-long-term debt rating on Feb. 7, citing its “wealthy economy” and “strong access to capital markets.” The yield on North Rhine-Westphalia’s 10-year bond maturing in March 2024 is about 1.8 percent, less than equivalent French debt.
The state will reduce its deficit further in 2015 without choking off spending, Kraft said in her e-mail. It’s called “pursuing budget consolidation with moderation,” she said.
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