Germany After Merkel’s Election Victory

After Chancellor Merkel’s expected victory in the federal elections, Germany will continue to drive the regional economy, but slower growth will go hand in hand with rising income polarization. Nor is Germany any longer immune to the decline of the Eurozone.

Through the summer, European leaders have bickered about the German elections, which they saw stalling European decision-making.

As far as Brussels is concerned, the slowdown in the Eurozone policymaking has involved big issues – from the contested joint debt liability across the region to massive youth unemployment in Southern European countries – and minor matters, including the EU compromise deal limiting car emissions which Merkel shunned because it will hurt leading German automobile producers.

In this behind-the-façade view, Chancellor Angela Merkel appeared as a reincarnated Bismarck – a conservative “iron chancellor” who unifies Germany, has little interest in foreign entanglements and is creating a new balance of power in Europe.

Fear of anti-Merkel

However, the squabbling did not morph into organized protest. While Southern Europe sees Merkel’s policies as economically destructive and Northern Europe suffers from a bailout fatigue, few Europeans want an anti-Merkel to head Germany.

As a result, even the rise of the anti-euro Alternative for Germany (AfD) actually defused Merkel’s euro opposition, which was not eager to fuel discontent in Germany.

According to pre-election surveys, some 8 percent of AfD’s supporters considered giving their vote to the party that needed and got close to the 5 percent vote-share to win seats in the German parliament, the Bundestag. While the majority parties tried to silence AfD to death, the party returned to the spotlight in mid-August when Finance Minister Wolfgang Schauble thrust the Greek bailout back on the agenda.

After the elections, Merkel’s policies have been vindicated in Germany and much of Europe.

Floundering SDP, plunging Greens

Since the onset of the crisis in 2007/9, Merkel’s coalition of Christian-Democratic Union and Christian Social Union (CDU-CSU) has dominated German politics. In the elections, its share of voters was around expected 42 percent.

When economic conditions have improved, the Social-Democrats (SDP) have gained (2006, 2010), but in each case they have been fought back.

Despite the deterioration of Germany’s economic performance, the floundering SDP led by Peer Steinbruck captured some 25 percent of the German voters.

What has been most stunning is the de facto collapse of the Green Party. In the past two years the support for the party has plunged to less than 10 percent. In part, its fringe issues have gone main stream. It has also been haunted by its leaders’ involvement in a pedophilia scandal. Further, its bland top candidate Katrin Göring-Eckardt has none of the edginess of Joschka Fischer.

According to surveys, the Greens have become a party of the privileged wealthy who can enjoy sustainable lifestyles.

Toward the ‘grand coalition’?

In relative terms, the fall of the business-friendly Free Democrats, Merkel’s coalition party, has been even more spectacular. After the global crisis, the party had a 20 percent support in Germany; today, less than 5 percent.

The FDP’s classic liberal ideology is a poor draw in an era when most Germans feel that laissez-faire capitalism is history. After Guido Westerwelle, FDP has been led by Philipp Rösler. As Merkel’s junior partner, the party has engaged with policies that violate its ideology. If it loses its role in the government, it risks fading into political nothingness.

After elections, the FDP is history as CDU-CSU’s junior partner. The most likely candidate for the new coalition partner is SDP. That, in turn, means tough talks. SDP will not offer its support without a high political price (read: cabinet posts and policy concessions).

Nor will the dominance of Merkel’s CDU-CSU erode anytime soon. According to recent surveys, some 36 percent of under-18 year old Germans support CDU-CSU, as against the SDP (24%) and the Greens (18%). While most German youngsters tend to lean to center-left, the political left is too fragmented to gain their support.

Nevertheless, even if Merkel’s coalition wins the majority in the lower house Bundestag, the upper house will remain dominated by the SDP and the Greens. Germany will continue to be governed by a de facto grand coalition of CSU-CDU, SDP and the Greens.

Domestically, the three have real differences; in the euro area their policy approaches are fairly similar.

Coopting opposing platforms

Nonetheless, Merkel has ingeniously coopted her opposition; not by confronting it, but by absorbing its core tenets. This involves even the Left Party, which is currently supported by every tenth German (but whose support peaked at 15 percent during the global crisis).

By endorsing minimum wages in many sectors, the phase-out of nuclear power, economic fairness and equality, Merkel has neutralized her opponents, one by one. As a result, the Social Democrats seek to re-brand themselves by pushing more into the center-left.

SDP is advocating a federal minimum wage (EUR 8.50 per hour) to all economic sectors, which is 40 percent higher than its current U.S. counterpart. SDP also seeks to raise Germany’s top marginal income tax rate to 49 percent for incomes over EUR 100,000.

Despite protests in Southern Europe, most Germans insist on economic reforms in exchange for German financial aid to ailing euro economies, whether the issue is the crisis itself, centralized bank supervision, or the European Central Bank’s monetary support (OMT program).

In the past, the consensus between Merkel and the French conservative Nicholas Sarkozy ensured euro unity for reforms. With socialist President Hollande in the Elysee Palace, the German stance has become more flexible. Before the elections, Merkel warned that a new debt cut for Greece could unleash a risky domino effect. In practice, she has left the door open to such a debt cut.

Low growth ahead

Through the global crisis, Germany fared better than other core economies in Europe. But in the past two years, the country has no longer been immune to the adverse impact of the lingering crisis in the West. As growth prospects in the large emerging markets have diminished, German exports have taken a hit.

As growth will gradually decelerate in Germany, balanced budgets will mean increasing income polarization, which is already aggravated by deepening urban poverty and rapid population aging. Economic efficiencies are being achieved at the expense of rising social costs.

As Brussels would have it, Germany is hoping to rely more on private consumption. But the latter cannot compensate for the slowdown in export growth. In the fourth quarter of 2012, GDP growth contracted. In the first half of 2013, it was slower than expected. In 2013, it is likely to remain around 0.5 percent.

Chancellor Merkel’s coalition government has navigated skillfully domestically, regionally and globally. Nonetheless, it cannot escape a Europe whose economic role in the world economy is on relative decline.