It’s the German elections, not the end of the world

On a European level, much has been put on hold until the new German government is appointed: The bailout fund known as the European Stability Mechanism (ESM) is not due to be set up until after the elections, the Irish government has admitted to delaying talks with the troika (the IMF, the ECB and the European Commission) on what would be the best bailout mechanism, the plans for a banking union have also been frozen, and finally, what will happen with the Greek bailout and possible debt relief also remains unknown.

The Greek media have been speculating feverishly about what the results of the German elections might bring. But is there really anything to expect? According to Iain Begg, professor of economics at the London School of Economics and associate fellow at Chatham House, there is not.

“It is a wrong perception to believe that we will see any major policy shift and those who believe in big changes will be disappointed,” he said.

by Styliani Kampani Blogs. Originally published on 2013/09/06

Ulrike Guerot, senior policy fellow and representative for Germany at the European Council on Foreign Relations (ECFR), holds a similar view. “The expectation that there will be massive changes is highly exaggerated,” she said. “This is one of the biggest misperceptions that people outside of Germany have,” she continued, adding that the Social Democrats (SPD) might have some room for maneuver if they form a grand coalition with the Christian Democrats (CDU).

The scenarios

A grand coalition would not be something new for German politics. In fact, it happened during Angela Merkel’s first term as chancellor from 2005 to 2009. That left bruising memories for the Social Democrats, who are currently celebrating their 150th anniversary with record-low polling figures and a rather unpopular candidate for chancellor, Peer Steinbrueck. Nevertheless, the SPD could potentially govern with the CDU, especially if the Free Democrats (FDP) do not reach the 5 percent threshold to enter the Bundestag.

According to Almut Moeller, Head of the European Union Unit at the German Council on Foreign Relations (DGAP), there could be two consequences from a grand coalition government. “Firstly it tends to be more inclusive with regard to the German domestic audience, so it would be easier to take necessary steps in the eurozone, if the Social Democrat electorates are also in,” she said. “Secondly, we will see a more social democratic influence in things,” pointing out that this will depend on the outcome of the elections for the Social Democrats. “If they are strong, they will have more leverage; if not, it will be more difficult,” she added.
In the case of a red-green majority surprise for the SPD and the Greens, then we will probably see “different European Union politics from those of the CDU,” Moeller noted. “The whole vision, especially of the Green Party, which I see is a lot more Europeanized, together with the SPD, would mean a different model for Europe, both in terms of substance and style. More social, more democratic, more along the lines of a sustainable economic model for Europe,” she added.

The chance of a red-red-green coalition – between the Social Democrats, the Left Party and the Greens – being formed is generally considered a last resort and an unlikely option. As polls consistently suggest, the CDU receiving about 42 percent of the vote will grant Merkel a third term as chancellor. If the Free Democrats make it to the parliament, a thin yet sufficient majority will be assured.

If Merkel is re-elected

Would that signal a policy shift? A coalition with the same components would not differ dramatically from its current stance and it would arguably have a mandate to continue its policies. Merkel’s ultimate attribute, as characterized by many analysts, is her pragmatism combined with a step-by-step approach and no grand visions. Guerot poses the question: “Is it a lack of vision or lack of ambition or whether precisely she has ambition and does

not talk about it?” She added: “If Merkel is re-elected in whatever coalition, changes will be only marginal. I would not overestimate the room for change in Germany. I think we will see another sort of muddling-through period.”

Explaining that Merkel might ask for more power from her government to implement her plans, Moeller argues that “she does not have a vision about a fully fledged economic and monetary union or about power transfer. She wants to navigate Europe out of the crisis and will do whatever it takes. The euro’s survival is so crucial that she will carefully balance it with German interests.”

Expectations

Even though the CDU administration denies the possibility of a further Greek debt haircut, it is likely this will happen after the outcome of the elections is known. Professor Begg sees a haircut coming soon alongside some sort of Marshall Plan to reset Greece’s stagnant economy. Even German economists such as Christian Dreger of the German Institute for Economic Research (DIW) and Kai Carstensen of the Ifo Institute for Economic Research at the University of Munich predict that Greece cannot get through without additional relief of its mounting debt. But when reading the joint election manifesto of the CDU and its sister Bavarian party, the CSU, one can easily understand that any kind of solidarity goes hand in hand with reforms and stark conditionality.

With regard to Eurobonds or Eurobills, Professor Begg argues that “slowly and hesitantly we will move towards a mutualization of debt. Eurobonds similar to US Treasury Bonds are still a long way off. It’s a huge step and we still have to persuade the Germans and diminish their fears of moral hazard.”

The elections in Germany are indeed important for Europe but will not solve the eurozone’s Gordian knot. As the distinguished British historian Timothy Garton Ash recently wrote: “Only together can we generate the policies and institutions, but also that fresh breeze of poetry, to get the

European ship sailing again.”

Disclaimer: This text was first appeared on the Kathimerini English Edition.