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How Merkel’s Resounding Victory Has Left Her Weaker…And What It Means For The Euro

By: Martin Tillier
Posted: 9/24/2013 9:42:00 AM
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Over the weekend it was confirmed that Angela Merkel and her CDU/CSU party had won a resounding victory in the German Federal elections. She is the only European leader to survive the financial crisis and retain power, and the center-right CDU/SDU came close to an absolute majority in the Bundestag. On the surface it would appear that the Chancellor’s position has been strengthened, that nothing will change, and that the effects of the elections on the Euro will be limited. Dig a little deeper, however, and the picture is not so clear.

Germany’s multiple political parties and proportional system of elections make it difficult for any one party to gain an overall majority; indeed, that hasn’t been achieved since 1957. While the majority party holds obvious moral authority in any ensuing coalition, the need to govern can result in some serious concessions to minority parties that are needed to form an effective voting bloc. When the ideology of the parties concerned coincides, this isn’t a major influence on policy. Until these elections, for example, the CDU has partnered with a natural ally, the pro-business FDP, another center-right party, although the FDP sits a little more to the right.

It may seem hard for American readers to believe that such a thing exists, but Angela Merkel is an immensely popular politician. In this case, however, that popularity has left her with a dilemma. Largely thanks to an increase in votes for the CDU, the FDP failed to garner the 5% of the vote needed to gain representation in the Bundestag for the first time since the Second World War. This leaves Merkel and her party in search of a partner.

The CDU’s popularity wasn’t the only factor in the FDP’s failure, however. There was also a strong showing by the right wing Alternative for Germany, or AFD. Their vocal opposition to bailouts for European debtor nations, and even to the Euro itself, indicates that a significant minority in Germany are disillusioned with the single currency. This fact has been the focus of much coverage of the election here in the US, but, while it may lead to Merkel and the CDU paying occasional lip service to the right, the fact remains that AFD have no representatives in the Bundestag.  Some kind of coalition with the left will be needed to form a government.

A “grand coalition” with the second most popular party, the center-left SDP, is a possibility. Other than that, in order to get a majority in the lower chamber, Merkel’s party will have to look even further to the left, to the Left Party or the Greens. Whichever path is chosen, it is likely that both the domestic and European policies of Germany will change somewhat. The SDP is likely to demand a minimum wage, a softer approach to fiscal tightening in European debtor states or control of the Finance Ministry as requirements for an agreement, according to observers.

Thus, a clear cut election victory has actually weakened Merkel and the CDU! Their popularity removed votes from the party closest to them politically, and therefore denied them an obvious coalition partner.

This should give pause to those who clamor for a multi-party system in the US, but I am more concerned for what it says about the future of the European economy, and particularly of the Euro. I have said before that the problems in the Euro-zone have faded from the headlines, but haven’t really gone away. Some countries, such as Ireland, have recovered somewhat, but in others, such as Greece and Spain, massive unemployment and social unrest still exist.

The next few days and weeks will see some delicate negotiations in Germany, and, while one of Merkel’s first pronouncements was that European policy would remain unchanged, some kind of adjustment would seem inevitable. Whether this is a hardening of attitude to undermine the upstart AFD or a softening to appease a potential coalition partner is as yet unclear, but something will have to give.