After the excitement around the Dutch and French elections earlier this year, the German election on September 24th offers financial markets welcome relief by promising to be dull. Barring a political miracle, external shocks, a huge scandal or disastrous polling, Chancellor Angela Merkel and her center-right Christian Democrats will win a fourth term in office. The only question is who her coalition partner(s) will be. Should we care about the makeup of this coalition? Is it not enough to bank on Angela Merkel?
Yes, we should; and no, it is not enough. In my view, Ms. Merkel’s choice of coalition partner will determine the future of the euro zone. Any government headed by her is likely to spend more in public investments and try harder to enact structural reforms. But when it comes to the integration of the euro zone, the currency area to which 19 of the European Union’s 28 members belong, the outcomes could be starkly different. In one coalition, German policy could return to insisting on the no-bailout clause; in another, it could support a euro zone budget with a European Monetary Fund; in yet another, it could amount to mere ‘muddling through’.
One potential junior coalition partner, the FDP, has a completely different vision for the euro zone.
The Christian Democrats (CDU) are comfortably ahead in the polls, the Social Democrats (SPD) are safe in second place, and four parties are at about 10 per cent and vying for bronze. So the options for the next German government range from an absolute majority for the CDU and its Bavarian sister party (the CSU) to coalitions of the CDU with the liberal Free Democrats (FDP), with the ecology-focussed Greens or yet again with the SPD (by contrast, a three-party coalition led by the SPD is unlikely).
Based on its election manifesto, Angela Merkel’s CDU advocates a European Monetary Fund, a vehicle to fight European youth unemployment and some tax harmonization between France and Germany. Recently, Ms. Merkel also appeared open to proposals for a euro zone finance minister, even though there is ample room for interpretation about how she defines this buzz word. At the same time, debt mutualization is explicitly ruled out. These plans, at least to some degree, point in the same direction as plans by Emmanuel Macron, the French president, and by the European Commission.
But one potential junior coalition partner, the FDP, has a completely different vision for the euro zone. It wants to adhere strictly to the ‘no-bailout’ clause; to keep a lid on the European Stability Mechanism (ESM), which is the precursor to a European Monetary Fund; to automatically punish members states that violate the EU’s Stability and Growth Pact that prescribes fiscal discipline; to enact a procedure for member states to declare insolvency; and to allow members of the currency area to exit the euro. These stances would make German economists happy. But they would hardly improve the euro zone.
Two other potential coalition partners, the Greens and the Social Democrats, are even more pro-European than the Christian Democrats. They want a euro zone government and budget, more EU-level investments, EU-wide youth-unemployment insurance and far-reaching tax harmonization. The SPD is also a strong supporter of a European Monetary Fund.
It is an unwritten law in politics that after election night, the ‘reset button’ will be pressed and all possible political combinations will be investigated, notwithstanding campaign slogans or election manifestos. But when it comes to actual integration of the euro zone, the next German government’s course will depend on two factors: 1) the degree to which Angela Merkel proves able and willing to convince her own party to support more euro zone integration, and 2) her choice between the FDP, Greens and SPD.
So do not underestimate the German elections and do not call them boring. For the euro zone and the whole EU, they are anything but.
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