Germany “should have a new government before Christmas,” Olaf Scholz said Monday, after his Social Democrats managed to secure the upper-hand in what amounted to a split decision.
There was nothing decisive about the election outcome. The German political landscape is fractured. Whether it’ll be fractious is the next question.
Scholz will try to form a government with the Greens and FDP. “If history is any guide, with three parties involved, coalition talks could drag on for several months,” UBS remarked, referencing the figure (below).
If you’re looking for irony, you can find some. As The New York Times put it, “governing as Merkel’s junior partners almost killed the Social Democrats, stripping it of its identity and its place as the leading voice of center-left opposition, but Scholz used his cozy relationship with the chancellor to his advantage, effectively running as an incumbent in a race without one.”
That strategy was effective — eventually. The end result was the worst showing for conservatives ever. It was the first time the bloc’s share of the vote came in below 30%.
To say Merkel’s shoes are too big to fill would be to materially understate the case. European leadership is now up for grabs, but it’s more than that. During the Trump years, Merkel took on a kind of caretaker role as de facto leader of the free world, a burden she shouldered gracefully, like so many other Herculean responsibilities over 16 years at Germany’s helm. She’ll remain until a new government is formed.
The impact of Merkel’s exit might be more pronounced globally than domestically. “Merkel’s governments often showed international leadership, but achieved little of note in domestic policy. We expect the opposite to be true of this government,” Credit Suisse said Monday. “There are likely to be substantial domestic policy changes, especially regarding the environment [but] the next chancellor may not have the commanding international presence of Angela Merkel.”
I’d replace “may not” in Credit Suisse’s assessment with “won’t.” Germany’s influence on the global stage will decline, and not necessarily because the new government does something wrong or because the coalition building process proves more arduous than expected. It simply isn’t possible to replace Merkel. As one think tank aptly put it, in remarks to the Times, “the presence and reputation of this chancellor is outsized and very hard to emulate.”
For the first time, a new coalition will involve three parties. Both SPD and the Christian Democratic bloc will take a shot at it. The Greens and FDP are kingmakers. The figures (below, from Credit Suisse) illustrate possible outcomes and assign subjective probabilities.
For markets, the impossibility of a leftist alliance was taken as a positive development. “With the threat of a pure center-left government avoided, German economic policy will be less affected, but should the SPD and the Greens both be included in a new government, the focus on redistribution and domestic investment will increase,” SocGen said Monday.
The bank added that “FDP’s policy divergences with the SPD and the Greens on topics such as tax increases, spending and regulation, [suggest] it will demand the finance ministry to support a traffic light coalition.” A spokesman for FDP told German television that the finance ministry is “an important point” for the party.
FDP seemed keen on the idea that a CDU/CSU, Greens and FDP coalition was now more likely, a notion the Greens dismissed, calling the election result “catastrophic” for Armin Laschet. Apparently, the Greens and FDP will meet to find common ground before bargaining with SPD and CDU/CSU.
FDP doesn’t want to raise taxes and aims to restore borrowing limits, demands that’ll be hard for Scholz and the Greens to swallow.
The next several weeks (months?) will be a game of headline hockey but, again, all that appeared to matter for markets in the immediate aftermath of the vote was the removal of the hard-left tail risk.
Traders will leave it to better minds to assess the ramifications of an angry world suddenly driving without the Merkel emergency brake.
To say Merkel’s shoes are too big to fill would be to materially understate the case. Merkel’s governments often showed international leadership, but achieved little of note in domestic policy.
I would argue those two sentences ought to be contradictory… especially as Merkel’s international decisions were disasters. She refused to support the PIGs during the Euro crisis (though maybe her hands were tied as Germans aren’t fond of deficits) and she accepted refugees – a noble instinct that provoked a political crisis across Europe with fascist parties on the rise once more (and there it didn’t seem to matter that Germans aren’t fond of dark skinned foreigners).
So international screw ups and no domestic achievement of note. Germany still a laggard in terms of carbon emissions reduction and one would not be wrong to say they look a bit afraid of pissing off Putin due to their (partial) reliance on Russian gas. Yet she is hailed as a titan of politics.
Is the bar really that low? Or is it that all you have to do is stick around for 15 years?
I disagree with pretty much everything you noted here.
First and foremost “it didn’t seem to matter that Germans aren’t fond of dark skinned foreigners”…. This is just a lazy generalization on your side!
It seems to me there is a part of the population “not fond of dark skinned foreigners” in every predominantly white nation.
For me personally, the Syrian refugee decision was actually one of her strongest moments; looking beyond the bigotry BS as the head/face of a Christian center right party speaks volumes.
She repeated a similar stance when the Bundestag was set to vote on same-sex-marriage. Back then Merkel urged lawmakers to vote their heart and not along party lines/opinions.
And by the way, AfD lost 2.5 percentage points since the last election, so even though the refugee crisis gave birth to a bunch of far right parties across Europe, the momentum has faded completely.
Concerning the PIIGS (yes Ireland was in that mix too!), she obviously had to keep a balance on that issue.
Remember that Germany was one of the first (if not THE first) countries that received a “Blauer Brief aus Bruessel”, an official letter from the EU that urged more fiscal discipline whenever new deficits exceeded 3% of GDP back in the late 90’s/early 2000’s?!
Germany cut deficits and never looked back; she clearly couldn’t just “throw money” at other countries without fiscal concessions. And by the way, there were so many voices back then screaming for an ousting of Greece et al in her own party/base that managing this situation was an absolute threading the needle kind of moment.
Clearly the biggest burden of “stabilizing” the EU’s finances fell on Draghi’s shoulders, but calling the whole situation a disaster as you put it is nonsense. In my eyes the EU ( and the European sense of belonging together) is stronger than ever before.
Domestically, a lot more could have been done, yes. A lot of (young) Germans feel like falling behind when it comes to new technologies, future oriented education, green incentives etc…. I too would have liked to see her cancel that dumb gas pipeline and push out coal etc. A lot of those failures to act come down to old entrenched industrial lobbying which is a shame but I hope a new coalition can make some headways in these regards.
Bottom line, maybe every head of state should have a PHD in sciences and grow up in an oppressive regime.
And generally: isn’t it a great a situation when you feel fine with any of the possible coalition outcomes of an election?
I know a great coalition (CDU/SPD) works well, SPD/Greens had quite a positive long lasting impact during Schroeder’s tenure, traffic light (SPD/Greens/FDP) and Jamaica (CDU, Greens, FDP) have a lot in common too. No matter which way, you’ll get a somewhat common sense government that’ll work just fine.
Compare that to the dysfunctional partisanship in two-horse-race countries… coughthe UScough
Yeah, the original comment (above) is borderline removable. It doesn’t quite cross the threshold for deletion, but it’s close. The idea that Merkel was an international “disaster” (as the original commenter put it) isn’t really an opinion. Rather, it’s closer to being a blatant falsehood.
More broadly, I’m growing weary of comments over time. There’s a reason a lot of sites have phased them out, and I’m starting to lean in that general direction.
I agree. She may have backstopped liberal democracy but in many respects was no titan internationally. Maybe the worst mistake the germans made was with Ukraine. The whispers I heard suggested germany egged on Ukraine and then backed off when it came time to step up when the Russians crushed the orange revolution and then invaded later when their proxy head of state was deposed.