Uncertainty Looming in Germany & Beyond

By: Ryan Bergal

Time’s 2015 Person of the Year and widely-renowned “leader of the free world” is entering a period of uncertainty. Germany’s chancellor, Angela Merkel, earned her fourth term as the nation’s head of government after the parliamentary elections on September 24, but the results did not leave Merkel or the Christian Democratic Union (CDU)[1] feeling victorious. The election marked the worst electoral performance by the CDU since 1949, stripping the party of 65 seats in the Bundestag, Germany’s legislative body.

There are now six parties with seats in the Bundestag for the first time since the 1950’s, and Germany’s populist, right-wing Alternative für Deutschland (AfD) entered the Bundestag for the first time with 94 seats after earning 13% of the German vote. The AfD has the third most seats in the Bundestag, and the center-left Social Democratic Party (SPD), who has the second highest number seats with 153, has ruled out forming a coalition with the CDU. These circumstances present a challenge for the CDU, who likely will need to form a coalition with the Free Democratic Party (FDP) and the Green Party to assert legislative dominance over Merkel’s right-wing opponents. For the first time in a while, the German political landscape is surrounded by question marks, and they extend beyond German borders.

There is much speculation that the circumstances that have arisen as a result of the German elections will significantly impact European monetary policy. Economists and foreign policy analysts believe the recent French elections, with Emmanuel Macron’s victory, could set the tone for future Franco-German agreements on Euro-reform issues. A fusion of French and German macroeconomic ideals could be a great formula for European monetary reform, with the French desire for a more integrated European financial and economic market and the German desire for national economic stability under overarching European regulations. One such area where there is great potential for Franco-German agreement is the establishment of a Eurozone budget. However, the results of Germany’s election suggest that the Bundestag will not be able to establish a consensus; even within the potential CDU-Green-FDP coalition, there could very well be conflicting opinions on Euro-reform policies.

The FDP has taken a hard stance on bailouts, voicing a clear opinion that Greece should be “escorted out of the Eurozone.”  Due to the FDP’s stance, coupled with the rising right-wing sentiment in the Bundestag, it might be in Merkel’s best interest to propose reforms to the European Union’s no bailout rule, which if Macron were in favor of, could alleviate potential negative consequences of the German election on European monetary reform. If Macron compromises on this policy, then France would want Merkel to agree to their ideas, but under the new Bundestag structure, such conditions likely will not arise. Germany, during Merkel’s fourth term, is going to be very sensitive to any EU or European Central Bank (ECB) policies that could generate economic or financial risk. These sentiments will drive Germany further away from potential policy agreements with France, and could trigger a stalemate for European economic policy – significantly impacting the value of the Euro.

Needless to say, the results of the German election have left Chancellor Angela Merkel with little satisfaction, and the future of her country – and how it will impact the rest of Europe –  are not known at this point. What is known, however, is that Germany is Europe’s strongest economy, has the fasting-growing GDP of any G7 country, and has an unemployment rate of just 3.7%. Despite all of these successes that have been established during Merkel’s tenure, many people in Germany do not feel satisfied with her performance as Chancellor. These feelings among the Germans have paved the way for the increased support of the right-wing AfD, which took away seats from the CDU and the SPD. With the SPD ruling out a coalition with the CDU, German politics are disrupted, and uncertainty has manifested itself both in the Bundestag and in European monetary policy.

[1] For the sake of this article, the CDU also includes its counterpart party for the German state of Bavaria, the Christian Social Union (CSU)

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