How a fractured German election result will impact the EU

Germans have voted themselves into a tricky political environment that could leave the country torn between the far left and the far right – without a good in-between alternative.

Chancellor Angela Merkel’s center-right Christian Democratic Union (CDU) led the pack in the federal elections to the Bundestag, the German Parliament, with about 33% of the vote. But it lagged behind the mark it set four years ago, as did the results for the party’s coalition partner, the center-left Social Democrats (SPD), which had just a little more than 20% of the vote.

Merkel’s victory was tempered by the SPD immediately announcing that it would not work with her to form a coalition. That leaves Merkel and the CDU with just one possibility for forming a functional government — the so-called “Jamaican” option (the colors of three parties involved are the same as the Caribbean nation’s flag) – which in this case would mean a three-way coalition with the libertarian Free Democrats (FDP) and the progressive Green party.

Also troubling for Merkel were the gains made by the far-right anti-Islam AfD party, which came in third with 12.6% of the vote – nearly triple its support four years ago. Alexander Gauland, the co-leader of the AfD, pledged that the party will “hunt” Merkel and investigate her policies on refugees and immigration.

The changes to the political landscape in Germany – Europe’s largest economy — has implications both for the country and also for the European Union as a whole. It also brings up serious questions as to whether Merkel will be able to end her political career on a productive note – and about who will succeed her as de facto leader of the EU.

Has the Tumult Come to an End?

“We’re done with the big elections in Europe, thank God – it was a tough year,” said Wharton finance professor Joao Gomes. “You can interpret the French election [of President Emmanuel Macron in May] in different ways, but neither one of these leaders comes up with a very strong mandate.”

The good news, according to Wharton adjunct management professor Saikat Chaudhuri, is that the election of Macron in France, Merkel in Germany and Prime Minister Mark Rutte in the Netherlands means that the wave of far-right populism on the rise in Europe and the U.S. has been kept at bay to some extent. He noted that while the AfD gained ground in Germany, the party itself is in turmoil, as evidenced by co-leader Frauke Petry’s decision to quit hours after the election. “The most important result for me is that, despite all the disappointments suffered by the major parties, Angela Merkel is back,” said Chaudhuri, who is also executive director of Wharton’s Mack Institute for Innovation Management. “It will be very, very important for her to at least try to create the right footing for Germany and for the EU together with other partners, even though they’re weakened.”

The German elections close a “very tumultuous” period of 16-18 months that saw the effects of Brexit, the U.S. presidential election and high-stakes elections in the EU.

“Now maybe we can have a phase where no one will be complaining, and we can get things done at the European level,” said Olivier Chatain, a professor of strategy at HEC Paris and senior fellow at the Mack Institute. “But that will depend a lot on the eventual composition of the coalition and the type of balance of power,” he added. Chatain and Daniel Kelemen, a political science professor at Rutgers University, appeared on the K@W SiriusXM show days before the election to discuss its likely impacts.

Kelemen saw a “trade-off” between the German people’s desire for stability and the “extremism” that could come about with stronger parties on both the far-right and the far-left. “A lot of people would like to see the same government return to power, and the same grand coalition [between the CDU and the SPD] that brings stability, and with their big majority they could pursue their mandate,” he said. “But in the long term that kind of a grand coalition of the two major parties’ breeds extremism, because people feel like they don’t have an alternative between the left and the right between elections.”

The SPD’s decision not to continue the “grand coalition” leaves Merkel and the CDU having to find a way to work with the Free Democrats, who are “socially liberal, but very much pro-business,” Chaudhuri said, and the Greens “who in many ways are seen as a detriment to pro-business.

“Undoubtedly the coalition dynamics are going to be complex,” he added. “Angela Merkel is very seasoned and right now she will be able to put something together. But whether she can sustain that momentum is really the question. At a time when Europe needed to come back strong, I think everyone is hoping it will be that way.”

Gomes predicted that three-way coalition may not have staying power for an entire four-year term. “At some point the Upper House of Parliament may be lost and maybe the Greens will bail out and we’ll have an early election and the SPD will win,” he said. “They want to be on the outside, they want to be in the opposition.”

The End of an Era

The election results leave Merkel without a clear mandate going into her fourth and final term. How that will impact her policy efforts remains to be seen, but Gomes doesn’t seen Merkel as the type of leader who feels like she needs to go out with signature wins.

“She’s not as driven by ego as you might see in other leaders,” Gomes noted. “One goal she laid out in her last term was that she is acutely aware of the aging of Germany and the need for renewal in Germany and the need for some sort of transformation. I don’t know how much she feels like he still has the time and energy to do, but I don’t think she has ambitions to make some big Eurozone reforms – if she does, I think she’ll be very frustrated.”

But the outcome of the German elections will undoubtedly have major impacts on the Eurozone, and Macron’s ambitious plans to reform the economic and monetary union. Macron has called for the appointment of a Eurozone-wide finance minister, a budget for the currency bloc and even a micro-parliament.

Chaudhuri and Gomes noted that the urgency for wide-ranging reforms has waned as the economic fortunes of the countries in the Eurozone have improved.

“What characterizes Merkel is that she’s a pragmatist. So from that point of view, she won’t start with unrealistic ambitions,” Chaudhuri said. “That’s one of the reasons for her success; she’s been able to adjust for what the needs were during each election and if that happened to be different needs from her party and from her personally, she’s adjusted to that pretty well.”

He added that if Merkel doesn’t envision that big reforms for the EU are possible, “she’s not going to push for it. But she’s going to do things she believes need to be done and move it forward perhaps in a smaller way.”

One issue that isn’t going away for Merkel is how best to shape immigration policy for Germany and the EU and how that interacts with concerns over security. “What’s going to be critical for Merkel is to balance an ability to be somewhat open-minded, or send the signal that Germany is open, that the EU is open, while being pragmatic and saying the plans she had earlier are not going to work in terms of immigration.”

He noted that one way to undermine the security threat from terrorism and usurp the far-right’s anti-immigrant agenda would be to seek a milder policy. “We want to be open, but we need to be careful; you want to find a balance of the two – not anti-immigrant, but we need security.”

Merkel’s Successor

As Merkel enters her final term, it’s not clear who will be her successor – both as the leader of Germany and as a strong force within the EU. Chaudhuri noted that SPD leader Martin Schulz has greater ambitions and, by opting not to form a coalition with the CDU, is gambling that he’ll be able to gain more prominence by going it alone.

On the European side, “I’m very hesitant to say that Macron will take the mantle,” Gomes said. “French presidents tend to have a peak that doesn’t tend to last and we’re already seeing the beginning of some unrest in France. I’m not sure how long [Macron’s] moral authority will carry him.”

Macron’s ability to enact reforms in France were dealt a blow over the weekend when his party won fewer seats than expected in the French Senate elections. “Macron and Merkel realize they need each other to some extent, given their mandates and situations,” Chaudhuri said. “Macron is new, he wants to get a lot of things done, he comes from a totally different background and he’s shaken up the French system. Merkel, while continuing her winning streak, has been considerably weakened. Germany and France have to find ways to bond – a lot of that will determine the future of the EU and the future of succession at the EU level.”