23 September 2013

Wolfgang Münchau: Merkel's almost total political triumph and its economic consequences

Writing for the FT, Münchau argues that the lack of threat from a numerically possible 'lefty' coalition marks major victory for Angela Merkel. In terms of crisis resolution, he predicts that nothing will be resolved.

Angela Merkel has achieved all her electoral goals: She will stay in power and also made it impossible for the three parties of the left to form a coalition against her during the next parliamentary term. For me, the biggest achievement was the total and utter destruction of the FDP, her junior coalition partner.

She also managed to keep out the Alternative für Deutschland (AfD), the anti-euro party, albeit with some luck. It was still a good result for a party founded only a few months ago, and which many had written off. I expect it to supersede the FDP as the second party of the right – and the only one with a clear alternative to Ms Merkel. I expect them to do well at next year’s European elections.

For the left, these results are disappointing, but not catastrophic. The SPD in particular has to make a number of difficult choices. It is hard to see how the SPD could ever return to power without shifting to the left – or at least be open to a coalition with a left party. It knows that Ms Merkel has a habit of destroying her coalition partners, but the SPD cannot really say "no" to her either. If they were to boycott the coalition talks, there would be new elections, which may leave Ms Merkel with an even greater majority. The Greens are another potential coalition partner, but I would expect the Greens to blink last.

Implications of the elections for the German economy and the eurozone are important, and they are not good.

1. The approach to crisis resolution – or non-resolution – will not change. Some investors have expressed the hope that she will accept what is known in the jargon as "official sector involvement" – allowing some of the debt to be forgiven. This is not going to happen. Some want the European Central Bank to write off parts of the debt it holds as part of its refinancing operations. I do not think this is likely either, given the hostility of the German public, the Bundesbank and possibly the German constitutional court to any form of monetary financing of government debt. My guess is that crisis resolution will increasingly take the form of what banks would call "pretend and extend". You extend the maturity of the loans, reduce the interest rates and pretend your credit is still whole.
2. Merkel’s victory will leave the general approach to macro-economic policy unchanged even if, as I expect, she enters a grand coalition with the Social Democrats (SPD). One should never underestimate the SPD’s tendency towards orthodoxy when in government. The party will continue to support the current restrictive fiscal policy stance in the eurozone.
3. The third economic effect of the Merkel victory is that it postpones the moment when the SPD will return to a more macro-economic perspective. This may still happen but not in the next four years. My guess is that the party will broadly support Ms Merkel’s orthodox policies in exchange for a few pork barrel-type spending commitments on causes it holds dear.

FT article on election result (subscription)

FT article on economic consquences (subscription)

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