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Mrs Merkel and Europe Rumble Forward

Mrs. Merkel and Europe Rumble Forward

  • 09.25.17
  • Markets & Investing
  • Article

Chris Bailey, European Strategist, discusses Sunday's German election results and their broader implications for party coalitions and national policy.

“Do you ever get the feeling that the only reason we have elections is to find out if the polls were right?” – Robert Orben

Coalition politics sounds messy to anyone schooled in the American or British electoral systems, so Sunday’s news about the German elections was immediately taken as a negative. While German Chancellor Angela Merkel and her CDU/CSU party topped the polls, she may now face months of negotiations to form a workable majority government. Mrs. Merkel herself has already observed that she had hoped her party would have done better, but, unlike many other incumbent politicians in Western Europe seeking re-election in recent years, she at least emerged from the election with her primacy broadly unimpacted. For those both in Germany, Europe, and the broader world that look to her for leadership, the better news from yesterday’s events is that her control remains indisputable.

However, following yesterday’s results, Angela Merkel will be coordinating a slightly different set of political allies. Germany has been ruled under a ‘grand coalition’ during Merkel’s last Chancellorship term, but the decision by the country’s second largest party (the SPD) not to reform this partnership (after their own worst national election results since the creation of the party in the years after World War II) creates Mrs. Merkel’s first challenge.

The most probable partnership is an unusual combination of the FDP (a pro-business, free market party) and the Greens in a coalition which has already been dubbed the "Jamaica" option, reflecting the combination of party colours that is akin to the colours of the Caribbean nation’s flag. This sounds as if it spans an unworkable range of interests. However, the reality is that this option has actually had this exotic nickname for many weeks, which indicates that it has been an expected political outcome for quite a while. In any case, the budgetary prudence of the FDP along with the clean energy focus of the Greens is mainstream Merkel-led government policy already. Undoubtedly, there are some issues around individual names and specific ministers to sort out, but with all three parties already coexisting in one of Germany’s important regional states, a ‘steady as she goes’ outcome for the operation of the German government is perfectly plausible.

As the largest party not in the ruling coalition, the SPD’s likely decision to become the official opposition is also driven by the rise of the AfD, a more nationalistic party that polled the third largest number of votes and will now have representatives in the German Parliament for the first time ever. Even though its economy has performed best in the euro zone in recent years, it is still apparent that Germany faces region-wide tensions around job security, immigration, and a feeling of the "haves and have-nots", which have influenced a rise in more populist voting across Europe.

Due to its past history, Germany is unlikely to be politically and materially impacted by such a trend, but the political warning for Europe’s current political leaders is very clear: inspire voters with hope and action, or risk a bigger backlash against centrist political norms at the next set of elections.

For Mrs. Merkel, such thoughts will especially resonate since she is unlikely to seek another term as chancellor, and hence is probably thinking about her ultimate political legacy. Yesterday’s election result and probable coalition partners are unlikely to hinder her role as Europe’s de facto leader, but it is likely to put her in a more contemplative mood about Germany’s role on a pan-European basis. This will probably include an ever-closer political relationship with new French President Macron, and a sharp encouragement of his ongoing reform efforts. This partnership will include agreeing to pragmatic and common sense driven decisions on issues such as Brexit and regional fiscal distributions to the still struggling Southern European countries (in exchange for their own economic reforms, naturally). Again, the overall aim will be to impress upon Germany’s fellow euro zone members that the pain of reform can be followed by the pleasure of better and stronger economic growth, but maybe this time with a little more compromise from Europe’s largest country.

Typically, the best way to inspire angst-ridden local electorates is to do the simple stuff well: more better paying jobs, efficient internal government, well thought out international trade, diplomatic engagement, and a generalised feeling of hope for the future. For Mrs. Merkel - in the autumn of her political career - her legacy setting can be very positive for the broader European economic fraternity and capital markets. Yesterday’s result changed none of this. Now all her experience and skills are going to be needed to cajole others across Europe to make sometimes unpopular reforms.

In short: as we were before Sunday’s elections.

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