When the Netherlands kept Mr Wilders out of power and Mr Macron swept into office in France, the immediate threats to the Euro disappeared. The recent collapse of coalition talks in Germany does not presage any undermining of majority support for the single currency in its heartland. The next major political issue facing the Euro is the election in Italy, where anti Euro parties will be on the ballot paper. They are likely to do well enough to make forming stable government difficult.
The inability of Mrs Merkel to form a government does however make things a bit more difficult for the euro area. Markets and the EU institutions have got used to Mrs Merkel offering quiet support and guidance to the zone from her position as the settled and stable leader of the largest economy and largest paymaster of the zone. When the September election results were reported many blithely assumed that because Mrs Merkel’s party was once again the largest party she would continue in office and offer continuity of policy. Those assumptions now look a little rash.
I wrote after the vote that Mrs Merkel had suffered a bad fall in her support and would struggle to establish a stable government. The German system is proportional, where the percentage share of the seats is similar to a party’s share of the vote. Mrs Merkel’s CDU slumped to just 26.8% of the vote. With her CSU ally they together commanded 32.9%. With their combined seat share at 246 out of 709 they need both the Greens and the Free Democrats to join them to command a majority.
Mrs Merkel was positive about her ability to bring off this unlikely coalition. Her deadline of Thursday 16th November came and went without a deal, and so did the extended Sunday deadline. The Free Democrats then announced they would abandon the talks. So what now are the options?
Mrs Merkel could try to find a way to bring them back in to the discussions. The lack of progress over several weeks of trying means this remains a very difficult plan. The Greens and the FDP disagree about energy and taxation. The CSU are insisting on tight controls on future migration into Germany whilst the Greens want a more open policy. The FDP point to a lack of trust amongst the parties, which is not easy to overcome.
Mrs Merkel could try to persuade her old coalition partners of the last Parliament, the SPD, to remain in government. They have been clear they have no wish to do this again, and argue that being in coalition damaged their electoral results in September. Mrs Merkel sees it as her preferred choice and will work hard to try to persuade the SPD to change its mind. It did deliver stability in the last Parliament. Polls suggest it remains an unpopular option with the public.
Mrs Merkel could announce she was forming a minority government, and then proceed vote by vote, building coalitions on issues as they crop up. One of the reasons she does not appear to favour this is the presence of the AFD as the third largest party with 94 seats. Mrs Merkel would not welcome their support, and is worried by their Euroscepticism and their hard line on migration. Such an option would also make offering stability and clear leadership very difficult, leaving the German government’s line on anything open to change based on Parliamentary pressures from opposition parties.
The President is the man who has to decide whether it is worthwhile asking parties to keep looking for a solution, or whether there needs to be another election. So far he has favoured trying more talks. Were he to conclude for an election, Mrs Merkel may come under pressure over her leadership and platform. Both her CSU allies and some within her own party want a tougher line on migration to give them some protection from the strong AFD challenge. The AFD are around 12% in the polls and have been traditionally hostile to the Euro as well as strong critics of Mrs Merkel’s EU migration policy. Another election would give them a further opportunity to try to detach more voters from the traditional parties. In the polls since the general election there has been a modest rise in support for both the AFD and the Greens at the expense of the two main parties. There is no sign yet that a second election would see a surge in support for Mrs Merkel to make it easier for her to build a new coalition.
Mr Macron is concerned about this weakness in Germany, as he wants to press on with Eurozone reforms which will need a strong German partner. Instead Germany at best will have a very weak government constantly worried about the popularity of the AFD, and at worst will need another election with an unpredictable outcome. The most recent news implies both the CDU and now the SPD do think they need to give constructing another Grand coalition a try, as neither party seems to like the idea of a another election. The Euro will have to rely more on the work of the European Central Bank in the absence of strong political leadership.
The above article was first published by Charles Stanley on 27th November 2017