Merkel-Trump

The New Friction Between Berlin and Washington

RTX3ALZD
Show your hands. Source: Reuters

No matter which coalition governs after the German election on September 24, several conflicts will strain relations between Germany and the Trump Administration, ranging from the German trade surplus to sanctions against Russia and Iran.

In Washington as in Berlin, the assumption is that Chancellor Angela Merkel will remain in office, either in coalition with the classically-liberal Free Democrats and the ecology-focused Greens, or yet again with the center-left Social Democrats. Her choice of coalition partner will affect the trans-Atlantic relationship to some extent, American analysts believe, but is unlikely to change Germany’s foreign and economic policies fundamentally.

“If Merkel does a coalition with the Free Democrats or the Greens, there is going to be more emphasis on holding Europe together,” said Jackson Janes, President of the American Institute for Contemporary German Studies in Washington. That is because the Greens are even more overtly for deepening European integration than the Social Democrats who are Ms. Merkel’s current partners.

The more Congress gets involved, the worse it’s going to be.

Mr. Janes added that if Ms. Merkel chooses only the pro-business Free Democrats (FDP) as coalition partner, policy might be “a bit tougher” against Washington’s demands that Germany reduce its trade surplus, which is the largest in the world but a non-issue from the FDP’s point of view. Prevailing opinion among Free Democrats, as among Germany’s business leaders, is that the surplus merely reflects the competitiveness of German exporters.

Jeromin Zettelmeyer, a senior fellow at the Peterson Institute for International Economics in Washington, said that if the Greens or SPD are in the coalition with Ms. Merkel, they may push for more public investments to help reduce the country’s current-account surplus, which has been criticized by other European nations as well as the US. Those parties see the surplus as a symptom of insufficient investment relative to savings rather than of export prowess, he said.

In his first eight months in office, President Trump has already vented his anger about Germany’s trade surplus with the United States, which reached $64 billion last year, the same as Mexico’s. The administration also complained about the value of the euro, which Peter Navarro, head of the new National Trade Council, charged was “grossly undervalued.”

We asked two of Germany's leading economists Clemens Fuest and Marcel Fratzscher to talk about the most pressing matters in economics.

The controversy about the euro, said Mr. Zettelmeyer, has lost some of its bite because the dollar has weakened by more than 12 percent against the euro since Trump came into office. A cheaper dollar, or more expensive euro, helps American exports. The reason, he said, is that “Europe has surprised on the upside” by beating expectations about growth, while disarray in the Trump Administration had simultaneously convinced investors that the kind of fiscal stimulus Trump promised is becoming unlikely. But the currency issue raised by Mr. Navarro had not gone away, Mr. Zettelmeyer said, because the administration believes the ultimate problem is the adoption of a common currency itself, which Mr. Navarro called “an implicit deutschmark”.

Mr. Janes also cautioned that Ms. Merkel is likely to put more distance between Europe and the United States. She first indicated this shift in her now-famous “beer tent speech” in May, when she said that “the era in which we could fully rely on others is over to some extent.”

“The two fundamentals of German foreign policy are “never again,” and “never alone again."”

Jackson Janes, President of the American Institute for Contemporary German Studies

But Mr. Janes added that two fundamentals of German foreign policy are “never again” and “never alone again” — referring to its legacy of atoning for the Second World War, and its determination never to be isolated in European or global politics again. He said this suggests that Ms. Merkel would spend much of her fourth term building coalitions with new French President Emmanuel Macron to strengthen Europe. “It’s time we get our act together,” she has been telling colleagues, he said.

Germany is also likely to keep increasing its defense spending gradually, with an ultimate target of 2 percent of gross domestic product. This target was agreed among NATO partners long before Mr. Trump came into office, but the US president has repeatedly and vocally insisted on it this year. Among Ms. Merkel’s potential coalition partners, only the Social Democrats have campaigned against the 2 percent target and higher spending on the army.

Mr. Janes also said he saw two potential new pain points in the US-German relationship: Russia and Iran. The first problem stems from efforts by the US Congress to punish Russia for alleged interference in the American election campaign of 2016 by imposing new sanctions on the government of President Vladimir Putin. Congress is considering trade sanctions against businesses that provide material support to Russian energy exports, which Berlin sees as a direct threat to German companies involved in the Nord Stream 2 pipeline being built to transport Russian natural gas across the Baltic.

US congressmen could accuse Berlin of “kowtowing to Russia”, Mr. Janes said, while the Germans could retaliate with trade sanctions of their own. “The more Congress gets involved, the worse it’s going to be, because Congress is telling the President you may not want to deal with the Russians but we do,” he said.

Another potential disagreement between the US and Germany will be the agreement with Iran to halt its nuclear-arms development. Mr. Trump has long said he dislikes the deal, which was negotiated by President Barack Obama as wells as Ms. Merkel and the leaders of Britain, France, Russia and China, although he stepped back this week from ending it outright. If Mr. Trump changes his mind and does break the agreement, “that could be a real explosion with the Europeans,” Mr. Janes said. Ms. Merkel has held up the agreement as a model and said it could be used to negotiate a similar nuclear agreement with North Korea, with Germany mediating. European companies have poured into Iran and their governments are not likely to re-impose sanctions on Tehran.

 

Charles Wallace is an editor for Handelsblatt Global. To contact the author: c.wallace@extern.handelsblatt.com

We hope you enjoyed this free article.

Subscribe today and get full access to market-moving news in Europe's leading economy.