Germany after the election: All change?

Germany’s election this week was contested by 34 parties and it was won by one person: Angela Merkel. At one point during election night it looked as if Merkel would even have an absolute majority in the new parliament. But in the end, her Conservative CDU (in combination with the Bavaria-based CSU) fell a few seats shorts of ruling alone. Merkel needs a coalition partner.

Since her former partner, the liberal FDP, failed to clear the 5% hurdle for parliamentary representation, she will need to share power with the opposition. Her most likely partner is the Social Democratic SPD, which got about a quarter of the votes. Merkel’s only other (and less likely) option would be the smaller Green party. Materially, it probably would not make a huge difference. The SDP and the Greens had been hoping to rule together, so their election manifestos look similar in large parts. Moreover, even if the SPD stays in opposition, Merkel would regularly have to seek compromise with it. That is because the SPD (together with the Greens) dominates the second chamber of parliament, the Bundesrat, which has a say in many areas of lawmaking.

Many in Europe will hope that with the more pro-European SPD in government, Germany will show more solidarity with struggling European neighbours and move faster on contentious but essential projects such as the banking union. But Germany’s EU policies are unlikely to change fundamentally.

First, Merkel will read the election result as solid backing for her European course – and with some justification. Surveys before the election showed that two-thirds of Germans liked how Merkel has handled the euro crisis. Faced with such clear public preferences, the SPD has long since stopped talking about Eurobonds, and it remained vague about its euro-related plans during the election campaign. The fact that the anti-bailout party “Alternative for Germany” almost made it into the Bundestag will give Merkel a stronger hand when fending off demands for more generous help for Southern Europe.

Second, the SPD has voted alongside Merkel’s government in almost all important decisions on euro bailouts (as did the Greens). When it comes to the euro, Merkel has effectively operated a grand coalition since 2009. The SPD could not credibly demand a fundamental change in a course it has so far supported.

Third, any move towards sovereign debt mutualization or joint banking guarantees would invariably end up before Germany’s mighty constitutional court. The court has already said that no German government is free to create unlimited liabilities for the German taxpayer.

Fourth, Merkel’s euro policies had already started changing in a way that is more compatible with SPD positions. For example, Merkel’s focus has shifted from austerity to economic reforms.

However, this narrowing of positions does not mean that German decision-making will get less cumbersome – to the chagrin of those who want to see decisive German leadership. The SPD will want to keep a sharp party political profile if it goes into government. After the last grand coalition with Merkel in 2005-09, the SPD’s share of the vote fell to 23% as voters could no longer tell what the party stood for.

Important questions of tax, jobs and welfare will be thrashed out before the coalition agreement gets signed. Foreign policy does not lend itself to setting clear lines in advance. So the SPD may be tempted to use EU policy to sharpen its profile in a grand coalition.

Would such politicization endanger the euro? Hardly. First, there are few contentious decisions on the near-term agenda. Merkel has all but admitted that Greece will need another bailout (and Ireland and Portugal at least a standby line) and the SPD – which often calls for “solidarity” – could not oppose this. The SPD is also in favour of a joint banking resolution fund (paid for by banks, not taxpayers), and Merkel’s doubts about such a fund might well be dispelled next year once the costs of dealing with past excesses (so-called legacy issues) become clearer.

While Berlin’s euro policies are unlikely to change much, there are other sources of uncertainty and delay that need careful observation. First, at some point in the autumn of 2013, the German constitutional court is due to rule on the legality of the European Central Bank’s “whatever it takes” bond-buying programme. It is unlikely that the court will declare the programme illegal. But if it tries to impose restrictions on its use, markets could react with panic. Second, Europeans will vote for a new European Parliament in May 2014. Important EU and euro business might get delayed by the impending elections. At the same time, the Parliament might be tempted to engage in a bit of populism to push turnout above the 43% seen in 2009.

Germany’s EU policies are unlikely to become more spectacular, but Europe will be far from boring.

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Author: Katinka Barysch was Deputy Director of the Centre for European Reform in London until July 2013. She is now Director of Political Relations at Allianz SE. She is also a World Economic Forum Young Global Leader. 

The views expressed here are her own.

Image: A voter casts her ballot during the German general election (Bundestagswahl) at a polling station in Berlin, September 22, 2013. REUTERS/Tobias Schwarz