Robert Francis

Account Director

Grayling Brussels

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
Angela Merkel
Angela merkel

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.


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.

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.



Eurocrisis and 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.

EUROZONE

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.

 


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.



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.