Germany: The next stop in the cam­paign for Europe's fu­ture

Financial Nigeria Magazine - - Contents -

Forecast High­lights

·Ger­man gen­eral elec­tions sched­uled for Sept. 24 don't present an im­me­di­ate threat to the eu­ro­zone, be­cause mod­er­ate forces will re­main in power.

·Afterthe elec­tions, Germany and the rest of the European Union will have to dis­cuss is­sues that have been post­poned, such as mea­sures to strengthen the eu­ro­zone. ·A cen­tre-right gov­ern­ment would be scep­ti­cal of mea­sures to in­crease riskshar­ing in the eu­ro­zone, while a cen­tre-left one would sup­port mea­sures to in­crease EU-wide in­vest­ment.

The first quar­ter of 2017 had the Dutch elec­tions. The sec­ond had the French elec­tions. The main po­lit­i­cal event in Europe dur­ing the third quar­ter will be gen­eral elec­tions in Germany. But un­like the pre­vi­ous votes, the Ger­man elec­tions sched­uled for Sept. 24 do not pose an im­me­di­ate threat to the po­lit­i­cal and eco­nomic sta­tus quo in the eu­ro­zone, mainly be­cause Ger­man Euroscep­tics are weak, and mod­er­ate po­lit­i­cal par­ties are likely to re­main in power. How­ever, the Ger­man elec­tions will be just as cru­cial for the fu­ture of the European Union. The next ad­min­is­tra­tion in Ber­lin will play a de­ci­sive role in shap­ing de­layed po­lit­i­cal, eco­nomic and in­sti­tu­tional de­ci­sions in the bloc.

The con­tenders to watch are the con­ser­va­tive Chris­tian Demo­cratic Union (CDU), led by Chan­cel­lor An­gela Merkel, and the cen­tre-left So­cial Demo­cratic Party (SPD), led by for­mer EU Pres­i­dent Martin Schulz. These par­ties cur­rently gov­ern to­gether in a coali­tion but will seek al­liances with smaller par­ties af­ter Septem­ber, mak­ing small po­lit­i­cal forces such as the cen­tre-right Free Demo­cratic Party (FDP), the environmentalist Greens, and left-wing The Left party, keys to form­ing Germany's next gov­ern­ment. The anti-im­mi­gra­tion and Euroscep­tic Al­ter­na­tive for Germany (AfD) will prob­a­bly en­ter the Bun­destag – the lower cham­ber of the Ger­man par­lia­ment – for the first time in this elec­tion, but the party will likely be ex­cluded from coali­tion talks.

The past year and a half have been a roller coaster for Germany's main

po­lit­i­cal par­ties. Merkel's pop­u­lar­ity de­clined con­sid­er­ably be­tween late 2015 and early 2016, when many Ger­man vot­ers crit­i­cized her de­ci­sion to open the coun­try's bor­ders to hun­dreds of thou­sands of asy­lum seek­ers. At the same time, AfD's pop­u­lar­ity reached record highs, fu­elled by im­mi­gra­tion fears. By early 2017, the pop­u­lar­ity of the SPD also rose sig­nif­i­cantly af­ter it ap­pointed Schulz as its can­di­date.

In re­cent months, how­ever, po­lit­i­cal sen­ti­ments have re­turned to form. The CDU is polling strongly again, and the "Schulz ef­fect" seems to be wear­ing off. The AfD, mean­while, is fac­ing re­peated in­ter­nal crises and is dis­ori­ented now that im­mi­gra­tion is no longer a press­ing is­sue for vot­ers. A no­table de­vel­op­ment is the FDP's re­cov­ery in the polls. In the past, it has been Germany's third-largest party and has par­tic­i­pated in coali­tion gov­ern­ments with both the CDU and the SPD. Af­ter fail­ing to en­ter the Bun­destag in 2013, the FDP could once again be king­maker. De­pend­ing on elec­tion re­sults, coali­tion talks could take weeks, if not months. In 2013, for ex­am­ple, it took three months for a coali­tion gov­ern­ment to be ne­go­ti­ated and ap­proved by the par­ties. Polls sug­gest that a coali­tion led by the CDU may only re­quire one more party (po­ten­tially the FDP), while a coali­tion led by the SPD would re­quire at least three. And while an­other "grand coali­tion" won't be a pri­or­ity for the CDU and the SPD, the par­ties may have no choice but to con­tinue their al­liance.

Con­cern­ing the Con­ti­nent

The CDU and the SPD, af­ter all, have markedly dif­fer­ent views on how Germany should be run. The con­ser­va­tives' pri­or­ity is to keep a bal­anced bud­get. The pro­gres­sives prom­ise to in­crease public spend­ing. Yet when it comes to the Con­ti­nent, both par­ties de­fend the European Union, Germany's mem­ber­ship in the eu­ro­zone and the need for a strong Franco-Ger­man al­liance. As a re­sult, the Ger­man elec­tions won't cre­ate an im­me­di­ate threat for the fu­ture of the bloc in the same way that the French elec­tions and the strong show­ing of anti-es­tab­lish­ment par­ties there did.

But while the Ger­man elec­tions won't al­ter the coun­try's mem­ber­ship in European struc­tures, they will still have an im­por­tant im­pact on the European Union. Af­ter a decade of cri­sis, the bloc is once again eval­u­at­ing a new round of in­sti­tu­tional re­forms. Many would have the goal of "com­plet­ing" the eu­ro­zone, in­tro­duc­ing poli­cies that would make the cur­rency area stronger and bet­ter pre­pared to cope with fu­ture crises. But eu­ro­zone re­form is con­tro­ver­sial and ex­poses the dif­fer­ences be­tween North­ern and South­ern Europe.

A coali­tion gov­ern­ment in­clud­ing the CDU and the FDP would prob­a­bly be less will­ing to ac­cept risk-shar­ing mea­sures in the eu­ro­zone, such as is­su­ing eurobonds (debt is­sued jointly by eu­ro­zone mem­bers), in­creas­ing EU-wide in­vest­ment plans or cre­at­ing a com­mon in­sur­ance mech­a­nism for banks in the cur­rency area. A cen­treright coali­tion would be wary of giv­ing in to such de­mands, which would come from coun­tries like France, Italy and Spain. A cen­tre-left coali­tion led by the SPD, con­versely, would be well re­ceived in Mediter­ranean Europe, as it would open the door for the kinds of poli­cies that the re­gion favours. Re­gard­less, the next gov­ern­ment in Ber­lin will ac­cept poli­cies that might com­pro­mise Germany's wealth only in ex­change for greater European Union con­trol of the economies of South­ern Europe.

De­cid­ing Ger­man For­eign Pol­icy

Si­mul­ta­ne­ously, the next gov­ern­ment will have to de­cide its poli­cies con­cern­ing the United States. The White House wants Germany to re­duce its trade sur­plus with the United States. U.S. Pres­i­dent Don­ald Trump's ad­min­is­tra­tion also wants Ber­lin to in­crease mil­i­tary spend­ing, putting it in line with NATO's goal of 2 per­cent of GDP (Germany's cur­rent de­fence spend­ing stands at 1.2 per­cent of GDP). A cen­tre-right coali­tion would prob­a­bly con­tinue to de­fend Germany's trade sur­plus, con­nect­ing it to the ef­fi­ciency of Ger­man ex­porters and ar­gu­ing that Ber­lin does not con­trol the value of the euro. But it would be more will­ing to ap­pease the United States by in­creas­ing mil­i­tary spend­ing. In re­cent

months, sev­eral CDU mem­bers have even said that Germany should in­crease its de­fence bud­get.

A cen­tre-left gov­ern­ment would prob­a­bly do the op­po­site: It would likely try to in­crease public spend­ing and raise the min­i­mum wage, which in the­ory should lead to an in­crease in im­ports and a smaller trade sur­plus. At the same time, it would try to re­sist pres­sure to take mil­i­tary spend­ing to 2 per­cent of GDP. While the CDU is will­ing to take a prag­matic ap­proach to the Trump pres­i­dency, the SPD's ide­ol­ogy makes fric­tions with the U.S. pres­i­dent more likely, as the cen­tre-left elec­torate is par­tic­u­larly crit­i­cal of the White House.

The next Ger­man gov­ern­ment will also have to de­cide what kind of re­la­tions it wants to have with Rus­sia. The SPD tends to be more sup­port­ive of keep­ing close ties with Moscow than the CDU. Dur­ing his term as chan­cel­lor, for­mer SPD leader Ger­hard Schroder (1998-2005) treated Rus­sia as a strate­gic part­ner, based on Germany's need for Rus­sian en­ergy and Rus­sia's need for Ger­man in­vest­ment and tech­nol­ogy. In that time the Nord Stream nat­u­ral gas pipe­line that con­nects Rus­sia to Germany was ap­proved. Since the in­tro­duc­tion of sanc­tions against Rus­sia be­cause of the events in Ukraine, for­mer For­eign Af­fairs Min­is­ter Frank-Wal­ter Stein­meier and for­mer Deputy Chan­cel­lor Sig­mar Gabriel (both from the SPD) have ad­vised keep­ing com­mu­ni­ca­tion chan­nels with Moscow open and warned about mak­ing de­ci­sions that would un­nec­es­sar­ily pro­voke Rus­sia. Gabriel has also openly de­fended Nord Stream II, a project to ex­pand the Nord Stream pipe­line.

But the CDU is not ide­o­log­i­cally against im­prov­ing Germany's ties with Rus­sia. Af­ter all, it was Merkel who op­posed Ukraine's ac­ces­sion to NATO a decade ago, un­der­stand­ing how sen­si­tive the is­sue was for Rus­sia, and who pressed on with the Nord Stream project. Like the SPD, the CDU is also un­der pres­sure from busi­ness sec­tors that want to re­sume ex­ports to Rus­sia and from com­pa­nies, es­pe­cially in the en­ergy sec­tor, that want to par­tic­i­pate in joint projects with their Rus­sian coun­ter­parts.

No mat­ter who is in charge in Ber­lin af­ter the Septem­ber elec­tion, Germany will base its pol­icy on Rus­sia on at least three fac­tors. The first is its de­pen­dence on Rus­sian nat­u­ral gas and busi­ness ties. The sec­ond is Ber­lin's need to re­as­sure coun­tries such as Poland, Latvia, Lithua­nia and Es­to­nia of its com­mit­ment to their se­cu­rity. The third is Ger­man public opin­ion, a sig­nif­i­cant part of which is cur­rently crit­i­cal of Rus­sia, es­pe­cially on is­sues such as Ukraine and the al­le­ga­tions of in­ter­fer­ence in elec­tions in EU coun­tries. A gov­ern­ment in­clud­ing the FDP or the Greens could in­flu­ence Ber­lin's poli­cies as well, be­cause these par­ties are crit­i­cal of en­ergy ties with Rus­sia.

See You in Septem­ber

With Germany en­ter­ing cam­paign mode, many de­ci­sions in Europe have been post­poned. But once Germany has its new gov­ern­ment, those is­sues – grant­ing debt re­lief to Greece and eu­ro­zone re­form, to name a few – will have to be de­cided. Most EU mem­bers are ex­pe­ri­enc­ing eco­nomic growth again. The years of ur­gent fi­nan­cial de­ci­sions are over. Po­lit­i­cal ques­tions re­main, how­ever. Mod­er­ate forces have man­aged to re­tain power in a cru­cial elec­toral year for the European Union. But the un­der­ly­ing fric­tions be­tween North­ern and South­ern Europe, and be­tween Western and Eastern Europe, will have to be ad­dressed if the bloc wants to start heal­ing its wounds af­ter a decade of cri­sis.

“Germany: The Next Stop in the Cam­paign for

Europe's Fu­ture” is re­pub­lished with the per­mis­sion of Strat­for, un­der con­tent con­fed­er­a­tion be­tween Fi­nan­cial Nige­ria and Strat­for.

Ger­man Chan­cel­lor An­gela Merkel

European Com­mis­sion head­quar­ters

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