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25 September 2013

What next for Germany’s leadership role in Europe?

A stunning victory for the great survivor

Those who picked up their morning paper in Germany on Monday morning would have been

confronted with a familiar image – the characteristic gesture of the old and now-new-again

Chancellor, with her hands shaping a rhombus, signalling continuity for the German voters – and

broadly more of the same.

Riding on a wave of low unemployment, a prospering economy, and general satisfaction with the

status quo, Angela Merkel sailed to a stronger-than-expected victory which was just short of

dealing her an absolute majority in the new German Parliament.

Ringing endorsement

Such impressive results represent a ringing endorsement of her leadership style in Germany and

in Europe, and she is one of the few national political figures around Europe to appear largely

untouched by the economic crisis engulfing much of the continent.

A political survivor par excellence – and a canny politician to boot. Yet there was some change in

the freshening autumn Berlin air.

FDP fall

For the first time in their 65-year history the traditional liberal democrats (FDP), part of her

governing coalition, failed to win a single seat in the Bundestag, while the eurosceptic AFD party

can hold their heads high, missing the 5% threshold by inches in their first ever election.

The result means that the former CDU-CSU/FDP coalition which governed Germany through the

crisis will likely be replaced with a Grand Coalition of CDU-CSU and the social democratic SPD.

Anti-EU sentiment

Moreover, during Ms Merkel’s third term, her leadership style, as well as the substance of her

policies, will continue to dominate – as long as she can calm an uneasy Upper House.

It would be a mistake, however, to expect this result to be replicated in next Spring’s EU elections.

The rising tide of anti-EU sentiment in Germany, coupled with voter antipathy, could lead to a

strong showing for both the AFD and the left “Die Linke” parties.

Ms Merkel can celebrate, for now, but the challenges for her new mandate are only just beginning.

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The results

Angela Merkel comes out as a

stronger than ever leader,

with her party (CDU/CSU)

winning a dominating role in

any future coalition, extending

its share of the vote from

33.8% to 41.5%.

Yet she remains paradoxically

even more dependent on

other parties, as her erstwhile

ally the liberal FDP failed to

win any seats in Parliament.

The largest opposition party,

the social democrat SPD, increased its voting share by a mere 2.7% to 25.7% but has

ruled out forming a mathematically possible left-wing coalition with the Greens, whose

share shrank to 8.4%, and the far-left “Die Linke”, which won 8.6% of the vote.

Left bloc fragmented

Die Linke, whose lineage goes back to the days of East Germany’s Communist Party, is

now Germany’s third largest party, and together with the Greens and the SPD

demonstrate how the country’s left bloc is fragmented, leaving the way clear for Ms

Merkel and her Bavarian CSU allies.

The anti-Euro party Alternative for Germany (AFD) obtained 4.7% of the vote. While

failing to reach the magical 5% necessary to win seats in the German Parliament, this

unexpectedly strong result raises the party’s prospects of a strong showing in next year’s

European Parliament elections.

Bucking the trend of European elections in recent years, turnout was actually slightly

higher than its all-time low in 2009, reaching 71.5%.

The road ahead

Negotiations over a new coalition are set to begin swiftly but are expected to be long and

arduous – at least, longer than the German Government average of 37 days.

According to the regular schedule, Ms Merkel’s third term as German Chancellor will be

officially confirmed during the first session of the Bundestag, to be held on 22 October at

the latest.

Yet her path to forming a coalition appears uncertain. The largest stumbling block for a

Grand Coalition with the SPD lies in a possible party referendum called by the SPD party

convention scheduled for next Friday. SPD members are all too aware of the high risk

they take if they enter into government for the second time with Ms Merkel. Following

the last Grand Coalition, SPD voters deserted the party like rats from a sinking ship,

leading to the very low levels of support seen today.

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While its likelihood to survive a full term must be in doubt, a Grand Coalition is still a

more likely scenario than the formation of a coalition between the CDU and the Green

party, whose leaders have staunchly spoken out against such cooperation, particularly

given the substantive and cultural divide with the regional CSU party of Bavaria, the

CDU’s long-term bedfellows.

Another possibility is for the CDU-CSU to

govern alone as a minority government,

particularly if the SPD gets cold feet and the

divisions between the Greens become too wide.

Such a scenario would however make for a

fragile government and go against Merkel’s

cautious manner.

Whilst negotiations continue, the German

President will instruct Ms Merkel’s government

to continue as caretaker government.

Policy challenges

The most likely scenario of a Grand Coalition, with

a strong CDU, will have ramifications for Germany’s

European and domestic agenda.

The campaign was dominated by domestic bread-

and-butter issues, with 57% of voters viewing

wages and pensions as the key issue.

Indeed, one major Grand Coalition fight could be

over the introduction of a national mandatory

minimum wage, which has been widely debated in recent months during the election and

which the SPD is likely to insist upon before entering into government.

An issue that stood on the sidelines throughout the election was Europe – a surprise,

perhaps, given the massive fiscal transfers that have been subsidised by German voters

for the benefit of the EU’s southern neighbours.

Throughout the campaign Europe was a minor issue, with only 31% of voters seeing it as

being important, and only 90 seconds of the much-hyped televised debate dedicated to

it.

A largely centre right government in Germany will also impact the country’s stances on

European policy topics, such as its responses to the Euro crisis, energy & environment

policy, and transport.

Germany would continue to be

the driver of growth and the

guarantor of stability, exerting

its leadership function in a

measured way and seeking to

unify the continent rather than

dividing it.

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Eurocrisis & reform

On election night German Finance Minister Wolfgang Schäuble said Europeans did “not

need to worry” about the German elections. Germany would continue to be the driver of

growth and the guarantor of stability, exerting its leadership in a measured way and

seeking to unify the continent rather than dividing it.

With respect to the crisis-torn Eurozone members, a conservative-dominated government

will likely follow-through on suggestions of granting Greece a third bailout package – if

necessary.

Yet although the aid-weary FDP was ousted from the Parliament, the triple lock of

parliamentary sovereignty, hostile public opinion, and a vigilant constitutional court will

continue to limit Germany’s willingness to share more European liabilities.

So what change, if any, can we expect from a third Merkel term?

The answer depends on who her coalition partners will be.

The SPD, determined to learn from its past mistakes, will likely want to play hard-to-get

and strive to avoid the damaging impact of its previous participation in a Grand Coalition,

should it be invited to join the government.

As a result, it may be more eager to push harder

for its domestic social agenda, including calling for

a minimum wage (see above).

Whether its stances on less austerity-centred policy

and more investments in Europe's crisis countries

will survive, however, remain uncertain.

Expected compromises also concern a bank

resolution fund, with the SPD wanting the banks to

themselves contribute to their recapitalisation

rather than digging into the taxpayer-funded

European Stability Mechanism (ESM).

Since the election it has been mooted in Brussels that, if such a Grand Coalition comes to

pass, Martin Schulz, current President of the European Parliament, will be put forward as

the Social Democrat candidate for Commission President.

Regardless of the inner workings of a possible future Grand Coalition, it seems highly

unlikely that a German will ever get to rule the roost over the Commission, with the

position likely to go to smaller, middle-of-the-road countries such as Finland, Portugal, or

Ireland.

Schulz: The new Commission President?

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Policy Outlook

Unless Ms Merkel decides to govern alone, environmental policies will likely rise up the

agenda for the next four years, yet this is not likely to bring about a reduction in the high

energy prices currently paid by German households.

Both the SPD and the Greens want

renewables to have a higher share in

electricity production than the CDU,

although the Greens’ 100% target for

2030 may be too bitter a pill for Ms

Merkel to swallow.

Both the SPD and CDU want to limit

exemptions from the renewables

surcharge (EEG) for energy intensive

companies, but the fact that the Greens

want to go further again in this domain

does not bode well for what is now

Germany’s fourth largest party.

A duel with the European Commission, which is also expected to launch an illegal state

aid probe into the exemptions, would appear to be on the horizon.

Without the Greens in power, the German government will also maintain coal as a core

component of the German energy mix for the foreseeable future, whilst the nuclear

option continues to be phased out.

A safe bet for the Government’s post-election

agenda is that Europe’s frontrunner in energy-

efficient, green technologies will continue to stand

up for its powerful industry in confrontations at the

EU level.

In the transport field, the Bavarian CSU party,

whose decade-long lock on Germany’s most successful state was recently strengthened

by achieving an absolute majority in state elections, had called for the introduction of a

transport toll to be imposed on foreign cars passing through the state of Bavaria, which

could in turn be extended to the rest of the country in the next government mandate.

While this proposal was rejected by the CDU for legal reasons (stemming from EU law), a

compromise will almost certainly entail more extensive infrastructure spending and –

possibly – other concessions to the state of Bavaria, still the richest state in Germany.

Europe’s frontrunner in energy-

efficient, green technologies will

continue to stand up for its

powerful industry in

confrontations at the EU level

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And what did other leaders say?

“Merkel will devote this third mandate, more time and energy, to Europe

than before because it’s not likely she’ll run for a fourth mandate in German

elections.”

European Commission President Jose Manuel Barroso

"I am confident that Germany and its new government will continue its

commitment and contribution to the construction of a peaceful and

prosperous Europe at the service of all its citizens."

President of the European Council Herman Van Rompuy

“The President noted his deep appreciation for Chancellor Merkel's

friendship, leadership, and steadfast support of the transatlantic

relationship. The President and Chancellor Merkel agreed to continue their

close cooperation on key issues of regional and global concern."

The White House

“Merkel’s historic absolute majority was an extraordinary recognition of her

efforts. The overall result clearly strengthens the European cause and its

unity."

Italian President Giorgio Napolitano

The French Presidency announced in a statement that François Hollande had

called to wish Merkel well. During their conversation, the two leaders

"expressed their willingness to continue their close cooperation to meet the

challenges of the European project."

…clearly, Ms Merkel’s re-election has been broadly welcomed by world leaders as it provides stability at a time of ongoing crisis in Europe, and she is once again seen as being one of the most respected leaders on the world stage.

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Concluding Remarks

With the final political make-up of the new German government uncertain for the time

being, the following weeks are most likely to see a strong CDU-CSU party attempt to woo

potential government partners, with Ms Merkel leading from the front.

Both her domestic coalition negotiations, as well as the German leadership role in

Europe, thus remain ever more firmly in Merkel’s hands.

However, the real obstacle is closer to home, in the form of Germany’s Upper House,

dominated by the SPD, and which has shown itself ever willing to block proposals coming

from the Lower House.

Despite changes below the surface, Brussels will likely see this election as a signal of

stability, with Germany remaining a predictable, though perhaps not the smoothest,

partner on key EU policy initiatives.

But on the national level divisions remain.

A lone leader, and one that is arguably more dependent on other parties than her own,

Merkel’s bridge building abilities will be sorely tested in the coming weeks.

infobrussels@grayling.com

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