May 19, 2017 By FTI Consulting
Chancellor Angela Merkel and her Christian Democrats (CDU) looks set to win the German election in September. The major remaining uncertainty is over the makeup of the coalition she puts together. Earlier in the year, the new leader of the Social Democrats (SPD), Martin Schulz, rallied Germans to his party. Through February and March, the SPD polled almost even with the CDU. It seemed possible that this “Schulz Effect” could alter the political direction of Europe’s largest economy. But this dynamic has been tested through three recent state elections, most recently in North Rhine-Westphalia (NRW), Germany’s largest state with a quarter of the nation’s population. In each state, the SPD came up short. The “Schulz Effect” observed in early polling has not materialized at the ballot box.
In Saarland, Schleswig-Holstein, and NRW, the CDU outperformed its 2012 election results (gaining 5.5, 1.2 and 6.7 percentage points, respectively), while the SPD lost ground (losing 1.0, 3.2 and 7.9 pps). In Saarland, the CDU will continue to lead a grand coalition with the SPD; in Schleswig-Holstein, the CDU is set to replace the SPD atop a coalition (the SPD’s all-left coalition is now short of a majority); and in NRW, the CDU is likely to form a government with the Free Democrats (FDP).
The rebound of the pro-business FDP in NRW is noteworthy. The FDP served as junior coalition partner in the second Merkel cabinet of 2009-2013, but lost representation in the Bundestag in 2013 for failing to pass the 5% threshold. But the party has recovered support, and is now just under 10% in national polls. And with the CDU(CSU) polling at 37%, a CDU-FDP coalition may be an appealing alternative for Merkel to the CDU-SPD grand coalition that has governed since 2013.
A left-dominated federal coalition seemed possible earlier this year; Berlin and the state of Thuringia are both governed by a coalition of The Left, the Greens, and the SPD. However, these parties together are polling at an aggregate 40%, far too low to be a viable majority. The anti-immigrant Alternative for Germany (AfD), polling at about 8%, is also set to gain representation in parliament. The party polled close to 15% support in the second half of 2016, but their numbers now appear stable at about 10%. Their decline may be the result of their own missteps, but may also be part of backlash in Europe against Trump-style populism.
In summary, Germany is set to have six parties in the Bundestag — two large and four small. While this is not a fragmented system in comparison to other countries in Europe, the Federal Republic has never had this many parties with representation. And this could make coalition-building a bit tougher for Merkel. When parties fall short of the 5% threshold, it boosts the seat-count of the parties that pass the threshold. For example, in 2013 the CDU won 41.5% of the vote but took 49% of the seats, while the SPD won 25.7% of votes but 30.6% of seats. This occurred because both the FDP (4.8%) and the AfD (4.7%) fell just short of the threshold, so their votes are removed from seat calculations. But this ‘bonus’ will disappear if the FDP and AfD achieve at least 5% in September.
But regardless, Merkel seems poised for a fourth term as Chancellor with either the FDP or the Social Democrats in a grand coalition.
In this era of global political angst, German voters appear relatively satisfied. And why not? The country is enjoying low (4.1%) unemployment, a $20 billion budget surplus, and rising productivity. As monthly polling by IPSOS confirms, Germans are more satisfied with their nation’s economy than are any other Europeans. But the largerproblems of the EU and Eurozone are Germany’s too. And Germany will likely be pressed to take an even greater leadership role in Europe.Over her career, Merkel has become increasingly pro-European. Under her leadership, Germany led the European response to the migrant crisis, and took responsibility for a million refugees despite the political risks this entailed for Merkel. She is also offering German leadership on security matters; Berlin has maintained a tough stance on Russian mischief in Eastern Europe, and the German military is at the forefront of NATO’s response. The Czech Republic and Romania are merging army divisions under German leadership; Germany and France are creating a joint fleet of transport planes.
But the greatest challenge for German leadership may be around European economics and finance, and on this topic the very economic success that Germany enjoys has become a source of unease. Germany has the largest current account surplus in the world (equal to 8.7% of GDP in 2016), and German officials have resisted policies that would shift German savings-and-investment levels to encourage more imports.
Germany has also taken tough (and some allege, moralistic) approach to the Greek financial crisis, refusing to accept a serious restructuring of Greece’ sovereign debt (at least until after the German elections). And Germany has adopted a similar tone with regard to enforcing EU budget rules on countries struggling to meet their deficit targets when, Germany itself flouted the rules for most of 2000-2010.
With the election of French President Emmanuel Macron, questions of European economics are now central to the future of the EU and Eurozone. Macron has a bold agenda of domestic economic reforms, but Macron also has an agenda for Europe, including common budgets, debt instruments and finance minister, and banking union. And France, along with much of southern Europe, believes it needs these Eurozone reforms to move beyond the economic lethargy that has characterized much of Europe for almost a decade.
Merkel and most of the CDU have adamantly resisted these changes. Schulz and the SPD appear more sympathetic to Macron’s vision; Schulz recently offered public support for Macron’s Eurozone budget proposal, and his SPD colleague Foreign Minister Sigmar Gabriel suggested that Macron should be given some leeway on the budget. But the best outcome for the SPD in September is to return as Merkel’s junior partner in coalition, which is not a particularly strong position from which to make policy. And if Merkel partners with the FDP instead, her junior ally will likely reinforce her party’s conservative instincts on these issues.
A fourth term will ensure an historic place for Angela Merkel in German politics. But the challenges that Germany will face during this term may also be historic, and may require leadership that she has not previously been compelled to provide.
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