The leader of the free world is still… well… the leader of the free world.
Angela Merkel is set toÂ be reelected chancellor for a fourth term. That matches her mentor Helmut Kohlâ€™s record.
The bad news is that it looks as though the coalition building process will indeed be as difficult as some suggested. Additionally, AfD performed better than expected.
- MERKEL’S PARTY DEFEATS SPD TO WIN GERMAN ELECTION: EXIT POLL
- MERKEL’S CDU/CSU TO WIN 32.5% IN GERMAN ELECTION: ARD EXIT POLL
- CDU/CSU-SPD OR CDU/CSU-FDP-GREENS COALITION OPTIONS: EXIT POLL
- GERMAN AFD TAKES 13.5% TO WIN FIRST BUNDESTAG SEATS: EXIT POLL
Here’s everything you need to know…
“A victory wouldÂ represent a remarkable capstone for Merkel, theÂ first East GermanÂ and theÂ first womanÂ to hold the position,” The New York Times writes, adding that “it would also represent a vindication of her pragmatic leadership and confidence in her stewardship of Europeâ€™s largest economy and of the European Union itselfÂ in the face of populist revolts.”
But it is bittersweet. AfD is set to enter the Bundestag for the first time. Eerily, it will also mark the first time since in almost sixty years that a far-Right party has entered the countryâ€™s parliament.
Alternative for Germany started as a euroskeptic party but has since transformed itself into a voice for the anti-immigration, anti-Islam sentiment that’s swept through Germany since Merkel became a beacon of hope for those fleeing violence in the war-torn Mideast in 2015. As The Guardian notes, AfD “vows in its manifesto to ban all mosques and minarets, prohibit Muslim calls to prayer and criminalize people wearing the veil, and calls for aÂ change in attitude to Germanyâ€™s historic crimes in the second world war.”
Consider the following from a recent interview WaPo conducted withÂ Alexander Gauland, AfD’s co-leader:
Washington Post:Â Nationalist parties havenâ€™t made it into the German parliament since the 1960s. What is happening in Germany now that explains their relative success?
Alexander Gauland:Â The “refugees welcome” policy ofÂ Angela Merkel alienated a lot of people, a lot of voters, as you can see in the demonstrations against Merkel. We call it â€œMerkel muss wegâ€ demonstrations, or â€œMerkel must go.â€
WP:Â Even with the AfDâ€™s success, itâ€™s not performing as well as populists in other parts of the world. Why is it that the AfD seems to be getting 10, 12, maybe tops 15 percent of the vote but is not getting more than that?
AG:Â That has a lot to do with German history. What is National Socialist in Germany is [considered] out of order and you canâ€™t discuss it correctly. It is very difficult for so-called right-wing parties to gain votes in Germany.
Right. “What is National Socialist in Germany is [considered] out of order.” As it turns out, there’s a reason for that.
But Alexander is proud of Germany’s World War II “heritage.” “If the French are rightly proud of their emperor and the Britons of Nelson and Churchill, we have the right to be proud of the achievements of the German soldiers in two world wars,” Gauland said in a speech to supporters earlier this month that was eventually uploaded to YouTube.
I don’t think I need to elaborate any further on why some folks think it might not be a great idea for AfD to be involved in crafting public policy in Germany, but just in case, here’s some useful color from Barclays (note the rather disconcerting bits in bold):
Stronger-than-expected AFD performance could pose a risk to the European policy implications of our scenario.Â This will be the first time that theÂ AFDÂ party will have a realistic chance of entering Germanyâ€™s federal parliament. The party wants to leave the euro area, close borders to unqualified migrants, pursue an ethnic repopulation policy and protect German borders against Islamic terrorism.
So that’s likely to cast a shadow over the results. Beyond that, this is just a matter of coalition building.
“Merkelâ€™s bloc, which includes her Bavarian allies in the Christian Social Union, had the support of about 36% of voters in the final opinion polls during the campaign, about 14 percentage points ahead of its main challenger and current coalition partner, Martin Schulzâ€™s Social Democrats,” Bloomberg reminds you, adding that “if the CDU/CSU and the FDP can get to a combined 48.5% or so — a level theyâ€™ve not managed in polling since late August — that would allow Merkel to reprise the business-friendly coalition she led from 2009 to 2013.”
Basically, anything other than that could mean prolonged wrangling, an outcome that isn’t exactly optimal, but they’ll figure it out. Here’s a quick summary of the implications from Bloomberg’s Paul Dobson:
German election day is finally here and, although opinion polls before the vote consistently had Angela Merkelâ€™s CDU/CSU parliamentary grouping some way ahead of the second-placed SPD, that’s not the end of the story.Â The opinion polls suggest it will require a coalition to form a government, and that could take several weeks — the current grand coalition took nine weeks to be decided on in 2013.
Even though there are obviously a multitude of domestic considerations and permutations from todayâ€™s vote, perhaps the biggest consideration for investors will be the broader read-across to Europe and the potential development of a stronger Franco-German axis with Emmanuel Macron. If this dynamic does indeed develop in the coming months, it will support the euro and see a narrowing of euro-area sovereign spreads. Much of this depends on Merkelâ€™s coalition partner — if there is a continuation of a grand coalition, further European integration may be more likely, with a Chancellor looking to cement her legacy working in concert with a Europhile Vice-Chancellor in Schulz.
A coalition with the more fiscally conservative FDP may make this trickier.Â The latest opinion polls suggested a grand coalition would be more likely than a CSU/CDU grouping with the FDP. However, conversations with Bloomberg Berlin colleagues last week raised the possibility of the SPD grass-roots rejecting this if the partyâ€™s share of the vote tumbles below the previous record-low of 23%. A Forsa survey released shows the party polling at 22% Much focus is also on the populist AfD party, which is set to have members in the German Bundestag for the first time, and could end up with the third-highest proportion of the popular vote. Should the party obtain more than the 11% seen in the recent Forsa poll, watch for a knee-jerk lurch lower for the single currency. This probably wonâ€™t last, however, as neither of the major parties has shown any enthusiasm for including the AfD in a coalition.
Finally, here’s Barclays again (note that this is from a preview published earlier this month):
Absent any three-party coalitions, which, given the diversity in election manifestos, appears less likely, the most probable outcome is a coalition between the two big parties, the CDU and the SPD, also typically referred to as a â€˜Grand Coalitionâ€™. The key question for our scenario is how large the parliamentary majority is likely to be.Â Given diverging political views, we believe that the â€˜Grand Coalitionâ€™ will need a majority of at least 60% to pass significant reforms effectively.
An Angela Merkel-led grand coalition is likely to have important economic consequences for Germany, the euro area and for EU reform.Â According to the election manifesto, the CDU is proposing a gradual abolition of the solidarity tax and an income tax cut worth EUR15bn (0.5% of GDP). Similarly, there is also an emphasis on raising military expenditure to 2% of GDP by 2024. The SPD, on the other hand, is in favour of greater social spending, such as the unwinding of some of the Hartz-IV reforms. Importantly, the SPD is clearly in favour of introducing a new European economic governing body to pursue coordinated European economic policies. Both parties favour the recruitment of 15,000 more police officers to address domestic security concerns in Germany. Interestingly, French President Emmanuel Macron is expected to give an important speech on 26 September, two days after the German elections, detailing his proposals to reform the European Union and the euro area. He will likely confirm his willingness to enhance cooperation in the areas of defense, security and immigration policies for the EU 27, and he will detail his plan to create a euro area finance minister supervising a euro area budget and a euro area parliament. Potential coalition partners in Germany are likely to follow closely Macronâ€™s speech.Â Overall, we believe an Angela Merkel-led Grand Coalition will likely engage in fiscal policy worth approximately 0.8% of GDP in 2018, and can be expected to support the creation of a European finance ministry.
A strong FDP performance is a risk to our main Grand Coalition scenario.Â The approval rating of the FDP has improved recently. Historically, with the exception of 2013, FDP electoral prospects have improved when employment has grown strongly in the previous year. The CDU and the FDP are the only two parties, other than the AFD, that have placed less emphasis on greater EU economic integration. While the election of President Macron in France raised the prospect of changes to EU institutions, including the establishment of an EU finance ministry,Â a CDU-FDP coalition would likely raise the bar, in terms of reforms required, for the creation of such an institution relative to a CDU-SPD coalition, given their more conservative stance towards fiscal risk-sharing.