18 September 2013

Douglas J Elliott: The German elections and the euro crisis

The German federal elections will have importance well beyond Germany's borders. However, the effects on the rest of Europe are likely to be subtle rather than constituting a decisive turning point.

What we know

Merkel will remain in charge
This is not an absolute certainty but rather a very high probability. Polls clearly show that her parliamentary faction will be the single largest and that lead, combined with the increasing fragmentation of the party structure in Germany, makes it difficult at this point to envision a viable coalition without her faction. Her status as the current Chancellor, her personal popularity, and control of the largest parliamentary faction effectively would guarantee her the Chancellorship yet again in any such coalition. 

There will be no popular mandate to renounce Europe.
Many German voters harbour concerns about the euro crisis and whether Germany will be forced to write large checks to bail out other countries. But they are not showing a willingness to demand a major pullback from European commitments. There is a new eurosceptic party, the Alternative For Germany, which wants to pull out of the Euro, but is currently polling at 3-4 per cent. Further, the Free Democrats do not seem to be benefitting from an apparent decision a year or two ago to try to capture some of the eurosceptic vote by calling for a tougher German line. 

Germany will continue to resist external pressures.
Many countries in Europe and elsewhere, including the US, would like to see Germany take steps to rev up its domestic spending, reduce its massive trade surplus, and allow inflation to move up to 3-4 per cent, easing the adjustment process for the troubled nations in the eurozone by allowing them to reduce relative costs without undergoing serious deflation.  A new German government may move a bit in those directions, but not very far.

What we don’t know

Which small parties will be in parliament?
As noted, the Alternative for Germany might make it over the 5 per cent threshold, but is not there in current polls. The Free Democrats are over 5 per cent in the polls and will very likely enter parliament, but it will depend heavily on tactical voting decisions that are difficult to predict.

Will there be a Grand Coalition?
Merkel might be able to assemble a parliamentary majority for her current coalition, but it is not the most likely result. If not, there is a high likelihood that she will have to cohabit again with the Social Democrats as in her first government.

Might Merkel lose her position as Chancellor?
I will be very surprised if she does, but, for completeness, it must be noted that there is a potential shaky coalition without her. The Social Democrats and Greens could take enough seats to potentially form a coalition with The Left (Die Linke) party. However, that party is viewed by many as being too extreme to be an acceptable part of any coalition government. If the Social Democrats and Greens do well, it remains much more probable that the Social Democrats use this theoretical option of a coalition with The Left as leverage for a better deal from Merkel in a Grand Coalition.

Will Germany be more flexible after the election if the euro crisis worsens?Germany’s overall orientation on Europe is not likely to change very much after this election. However, the election could give Merkel more flexibility in cutting any crisis deals that may be necessary. Even with a Grand Coalition with the Social Democrats, who have views more in line with the majority of Eurozone nations, Merkel’s views and those of the German public would limit the flexibility. However, it would still be greater than she has had in her existing coalition with Free Democrats.

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© Douglas J Elliott