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German elections: a Caribbean hurricane for Europe?

September 25, 2017 by andrew36 Leave a Comment

The Caribbean has been in the news lately for a succession of damaging hurricanes. Yesterday’s German elections seem almost certain to lead to a so-called Jamaica coalition between Mrs. Merkel’s conservatives (CDU/CSU), the liberal FDP and the Greens. (The party colours, black, yellow, green, are those of the island’s national flag). Is Europe in for stormy times? It certainly looks like it.

The debate on reforming the EU and especially the Euro Area is at a critical phase. There has been a flurry of proposals and reflection papers from the EU Commission and think-tanks. Jean-Claude Juncker’s recent State of the EU speech held out the prospect of a push towards deepening EMU. The new French President, Emmanuel Macron, has embarked on domestic reforms, part of the rationale of which is to open up space for Euro Area governance reforms. A speech on this issue is scheduled for this week. Everyone has been waiting for the German elections.

And now this.

The grand coalition of conservatives and social democrats has been pummeled by the electorate. CDU/CSU lost more than 8%-points, SPD more than 5%. The two Volksparteien both received lower scores than at any time since 1949. With the SPD stating clearly that it is not available for a further four-year term, the only viable alternative is Jamaica.  The liberal FDP successfully returned to the Bundestag (10.7%) and the Green vote held up (9%).

Merkel’s conservatives are running scared of the right-wing populist, and euro-critical AfD, which surged to third place with 13%. The FDP programme explicitly rules out steps towards further integration of economic policymaking. If there is to be an EU finance minister, his/her task is merely to more credibly impose strict fiscal rules. And if not you – Greece – are out. The Greens, it is true, are arguably the most integration-friendly party in Germany, but they are the smallest of the three parties and its leadership has other priorities.

Clearly some compromise will have to be found within the coalition on European (as on other) issues. Much will depend on the division of ministerial responsibilities. The delays in resolving the Euro crisis have many causes, but not the least among them has been the intransigence and macroeconomic illiteracy of Germany’s finance minister, Wolfgang Schäuble, whose views dominate the Eurogroup. It does not follow, however, that a change will be unequivocally an improvement. It is traditional in German politics that the junior coalition partner is given the first choice of ministerial post; the largest party, of course, occupies the Chancellor’s seat. The FDP has already made it clear that it wants the finance ministry, with some spokespersons even claiming this as a “red line”. The Greens will naturally want the environment ministry and, judging by the post-election TV leaders’ debate, Green lead candidate Katrin Göring-Eckart fancies labour and social affairs.

What are the likely outcomes?

Merkel will remain Chancellor. But the conservative wing of her party is now at bay (as is the Bavarian sister party CSU). Expect more “Germany first” rhetoric. While she has recently shown some awareness of the need to meet Macron and the EU Commission half (or at least part) way, I expect this will now be put in the deep freeze. Either the CDU will insist that Wolfgang Schäuble remains: bad enough in terms of Euro Area reform. Or, more likely, I think, the new German finance minister will be from the FDP. Given the party’s explicit positioning on this issue, this might even be a step backwards. The only hope is that the need to placate Green ministers – even if their focus is on (important) domestic issues – and parliamentarians in order to keep the coalition together will moderate the language and positions on Europe.

Unfortunately it must be supposed that an immediate consequence of the new political landscape will be that Germany will fight tooth and nail to have Jens Weidmann ensconced as ECB President. Both politically and in economic policy terms that alone risks taking the Euro Area back to the dark days of crisis without a central bank willing to “do what it takes” to save the currency and thus stabilise expectations. It can hardly be supposed that this prospect will encourage pro-EU parties in Italy, where crucial elections are in the offing. We will also have to see how Macron and other EU partners react.

There is uncertainty about these predictions. We will have to see how the coalition negotiations pan out. But there is no getting around the fact that the vote in the EU’s largest member state, with the unexpectedly large surge of right-wing populists, is a setback to those pushing for the needed deepening of integration in the euro area. Prospects had been brightening – with amongst other things the Brexit travails, the Trump effect, Macron and the steadily improving economic situation. Now it looks as if we need to batten down the hatches and prepare for stormy weather.

 

 

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Filed Under: Analysis Tagged With: CDU/CSU, ECB, economic policy, elections, Euro Area, FDP, Germany, Jamaica, Juncker, Macron, Merkel, Schäuble, SDP, Weidmann

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