Article / 15 October 2016 at 10:00 GMT

Falling next fall? Angela Merkel and stability in Europe

  • At home, Merkel is under attack from the political right
  • Gallup shows her coalition majority is thinning while the new right is gaining
  • Germany's economy is sound
  • Europe's largest economy should invest more - critics
German road

Everything comes with a price: roadside trees make German 
countryside lanes beautiful - and dangerous. Photo: iStock

By Clemens Bomsdorf

In the first article published October 8, we argued that Angela Merkel’s manoeuvring space has become smaller internationally and hence the same happened to her ability to convince Europe that her policies are the right ones. In Germany, the picture looks similar, which endangers her position as future head of government. 

In her home country, Merkel is under attack from two sides or, well, maybe from one side only since both aggressors can be found on the political right. The relatively new party AfD or Alternative für Deutschland (Alternative for Germany – read here a portrait of its boss Frauke Petry in The New Yorker) attracts so many votes that it could become hard for Merkel’s CDU to form a coalition.

Germany's Dax since late 2010 (last election were held in September 2013; click to enlarge)
Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more 

AfD, originally founded as a party opposed to the euro, has since Petry took over as its leader emerged as one mainly arguing for decreasing the inflow of foreigners and aiming at policies mirroring a re-establishment of more positive words like “völkisch” (racial) in order to defend “German values”. 

Clearly AfD profited from fighting Merkel’s very liberal take on refugee inflow taken last summer when she said “Wir schaffen das” (her version of “Yes we can”), a quote that she recently has put into perspective as integration has proved a more difficult task than expected.

It might be for that reason that the AfD in polls is no longer increasing. However, it has weakened the position of Merkel’s party in recent elections in federal states and it will as mentioned probably decrease CDU’s share in next year’s German federal election as well.

Flipside of the 2-Deutschmark-coin: CSU's Franz Josef Strauss 
got honoured that way after his death. Photo: iStock

From the CDU’s sister party, CSU, which only runs in the state of Bavaria (where CDU does not run), there is similar critique as from AfD. Horst Seehofer, CSU’s head, continues in the tradition of Franz Josef Strauss, who governed CSU and Bavaria for decades (CSU from 1961 and Bavaria from 1978, both until his death in 1988 to be precise) and was a rival as well as a partner to Helmut Kohl, and aimed at clearly positioning CSU more right-wing than CDU. 

Seehofer has demanded a pre-defined maximum intake of refugees, improved pension payments for mothers and he invited Merkel critic and Hungarian prime minister Viktor Orbán to a party meeting. In Bavaria, conservatives are traditionally a bit more on the right than in Germany on average and Seehofer with such ideas tries to attract voters while keeping them from AfD. Though a very recent Gallup says he is losing support while Merkel gains, this does not help her CDU much.

Seehofer risks two major drawbacks:

  • his criticism could weaken Merkel within the CDU/CSU to the point that she will no longer run for chancellor, but another person that is liked less by the electorate will take over – that could cost CDU and CSU the power,

  • his criticism could make CDU/CSU look that much being at odds with each other that even with Merkel on top the election result will be too weak to head a coalition.

That Seehofer sometimes does not mind pushing his part at the expense of CDU and the coalition shows in a recent example. His party is responsible for what could become one of the costliest policies of the current coalition: a road charge for foreigners. Not only is it technically challenging and expensive, but also made Brussels concerned, meaning it will take Germany to court.

To stay in power until and after election and thereby bring some stability to Germany and Europe Merkel needs not only to again strengthen her position in Europe, but also needs to get more support at home, where she is as discussed challenged mainly by the right. 

Also a continuation of the current grand coalition, but led by the Social Democrats would bring similar stability. However, Gallup polls suggest that that is even more unlikely. According to recent data, her current CDU-led coalition with the Social Democrats should be able to continue, but it does attract only 50-55% and SPD remains much the smaller junior partner, while AfD is seen to reach 12-15% with still a year to go. 

At the beginning of October, a first CDU politician (which at least plays some role in his party)argued for his party forming a coalition with AfD in order to not let the left parties gain power. Hearing what Merkel and other leading CDU members say this can, however, be excluded for the time being.

German GDP growth
Source: Destatis
At least the economy should not be a hindrance to Merkel being reelected. “The German fiscal position remains sound. The general government budget is projected to run a slight surplus until 2020; the debt-to-GDP ratio will continue to fall below 60% by 2020”, finance minister Wolfgang Schauble said in a October statement to the IMF and the OECD data presented in the previous article shows that Germany indeed for the near future has particularly good growth prospects. 

However, economists demand from Merkel and her government to make use of this strength in order to build an even stronger Germany and Europe. Money cannot only be saved, but also invested.

“Scratch the surface and the German economy does not look as formidable as its reputation. Politicians in Berlin over the past decade have failed to build on the economic reforms of former chancellor Gerhard Schröder. With interest rates at record lows, Chancellor Angela Merkel’s government may be missing a historic opportunity to invest more in the country’s future”, is how Noah Barkin, special correspondent for Europe at Reuters, in July commented to Carnegie Europe when asked whether German strength is an illusion. “The short answer is no,” he also said.

Further reading on Tradingfloor:

Clemens Bomsdorf is a consultant editor at Saxo Bank


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