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Germany after the elections: - what the result means for the British and EU economy?

Thursday, October 24, 2013

Meg was invited to give her views on the likely result of the German election for Britain and the European Union.  The event was co-sponsored by the European Parliament Information Office in the UK, the Friedrich-Ebert Stiftung and the Konrad Adenauer Stiftung.

Thank you for inviting me. I see from the news today that the coalition negotiations are now nearing the end of the beginning. I doubt that any British audience will manage to follow the negotiations closely. We struggle to understand our own coalition with many of the twists and turns justified after the event; there is not much chance of understanding the long process of putting together a German coalition.

The most likely new German government is a repeat of the 2005 2009 ‘grand coalition’. This would see the Christian Democrat Union (CDU)/Christian Social Union (CSU) alliance once again join forces with the centre-left Social Democrats (SPD).

My remarks today are made with this in mind.

The end of austerity?

With Merkel winning over 40% of the vote it would be naive to see this as anything other than an endorsement of her steady leadership. Consequently I do not expect to see significant change in German economic policy.

She will make some concessions - for instance the SPD are demanding the introduction of a national minimum wage as a precondition of returning to government. At best however an alliance with the SPD will mean Merkel will have a slighter softer approach towards austerity.

The SPD will seek steps to promote growth, but it is important to note that where and when it matters in the chamber of the Bundestag they have always voted with Merkel, for the mantra of austerity.

For the struggling Eurozone countries there might be a relaxation of the conditions tied to their bailout loans. However, Merkel is unlikely to steer from the path of bringing budget deficits under control.

Taking a lead European Union reform

Merkel’s second term as Chancellor was dominated by questions of austerity and bailouts. She remained quiet on the broader issue of wider European integration. Indeed, throughout the Eurozone crisis she preferred an intergovernmental approach, shifting from an approach driven by EU institutions.

Given Merkel’s strong position following the election she could take a more proactive approach to EU reform. Backed by the pro-EU SPD, she could pursue bolder and more pro-integration Euro policies, and will be under pressure to lead on banking and political union.

David Cameron will have welcomed Merkel’s re-election, since she has appeared open to some of the practical reforms he claims to want. I don’t think it is likely that he will secure significant reforms as he hopes. His failure to control his own party, and his panicked promise of a referendum in 2017, served to diminish the UK position and influence within Europe. My party is clear that a referendum is not a good idea. Business wants certainty and the prospect of a referendum means that businesses don’t see Britain at the centre of Europe.

It is important that Britain retains influence and engages in constructive debate about EU reform. The EU is crucial for the British economy. To contemplate shrinking our home market from 500 million consumers to just 60 million does not make sense.

This is not to say the EU does not need reforming. Of course it does. But we must focus on securing the right kind of reform for Britain and Europe. The European Parliament and Commission must become more streamlined and effective.

The Eurosceptic ‘Alternative for Germany’ 

It is worth noting the relative success of the new, Alternative for Germany (Afd) party, which secured 4.7% of the vote, just short of the 5% required to enter the Bundestag.  

The AfD is not opposed to Germany’s EU membership, but their policies are strongly Eurosceptic by German standards including calls for ‘an orderly dissolution of the euro zone’.

With the 2014 European Elections looming, Merkel will be conscious of the rise of the AfD. This provides an incentive for her to show commitment to giving the EU a sense of direction.

Despite clear policy differences between the AfD and the UK Independence Party, Cameron will be cautious of the AfD’s popularity. Given the Tories confusion with their attempts to contain UKIP, and Cameron’s incapability to offer a coherent or principled approach towards EU reform, the German election has the potential to shape the political agenda in the UK.

Internationalism

Currently there is discussion about which ministries the junior coalition partner the SPD might get. With the possibility of the foreign ministry or the finance ministry, this could see the SPD seeking a closer alliance with their political partners in France. The reality is likely to be France and Germany at the heart of economic Europe.

Indeed, the prospect of a grand coalition with the centre-left SPD will be welcomed by the Elysee Palace. With President Hollande also having four years left on his term, we can expect to see a much stronger working relationship between Merkel and her French counterpart.

At times Merkel has appeared disinterested in aspects of defence and security policy, she will be under pressure, not least from the French, to develop German strategy. This is crucial given the extraordinary changes that are sweeping across the Middle East where President Hollande has been engaged. Merkel, all too aware of the US ‘pivot’ towards Asia, and coupled with criticism over her indecision in relation to Syria, will be cautious of Germany losing influence.  

Conclusions

What happens in Europe’s largest and most successful economy affects the rest of the continent and has repercussions further afield.

Having the SPD as part of the grand coalition will mean some changes. It may mean a softening of her harsh austerity policies. However in winning a third term Merkel will be encouraged to continue with her emphasis on savings, cuts and structural reforms.

The next German government must decide if it supports a more integrated Europe or one in which the member states continue to push their own national interests. Either choice will have immense implications for Europe’s role as an economic and political player.


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