Forecast Highlights
- German general elections scheduled for Sept. 24 don't present an immediate threat to the eurozone, because moderate forces will remain in power.
- After the elections, Germany and the rest of the European Union will have to discuss issues that have been postponed, such as measures to strengthen the eurozone.
- A center-right government would be skeptical of measures to increase risk-sharing in the eurozone, while a center-left one would support measures to increase EU-wide investment.
The first quarter of 2017 had the Dutch elections. The second had the French elections. The main political event in Europe during the third quarter will be general elections in Germany. But unlike the previous votes, the German elections scheduled for Sept. 24 do not pose an immediate threat to the political and economic status quo in the eurozone, mainly because German Euroskeptics are weak, and moderate political parties are likely to remain in power. However, the German elections will be just as crucial for the future of the European Union. The next administration in Berlin will play a decisive role in shaping delayed political, economic and institutional decisions in the bloc.
The contenders to watch are the conservative Christian Democratic Union (CDU), led by Chancellor Angela Merkel, and the center-left Social Democratic Party (SPD), led by former EU President Martin Schulz. These parties currently govern together in a coalition but will seek alliances with smaller parties after September, making small political forces such as the center-right Free Democratic Party (FDP), the environmentalist Greens, and left-wing The Left party, keys to forming Germany's next government. The anti-immigration and Euroskeptic Alternative for Germany (AfD) will probably enter the Bundestag — the lower chamber of the German parliament — for the first time in this election, but the party will likely be excluded from coalition talks.
The past year and a half have been a roller coaster for Germany's main political parties. Merkel's popularity declined considerably between late 2015 and early 2016 when many German voters criticized her decision to open the country's borders to hundreds of thousands of asylum seekers. At the same time, AfD's popularity reached record highs, fueled by immigration fears. By early 2017, the popularity of the SPD also rose significantly after it appointed Schulz as its candidate.
In recent months, however, political sentiments have returned to form. The CDU is polling strongly again, and the "Schulz effect" seems to be wearing off. The AfD, meanwhile, is facing repeated internal crises and is disoriented now that immigration is no longer a pressing issue for voters. A notable development is the FDP's recovery in the polls. In the past, it has been Germany's third-largest party and has participated in coalition governments with both the CDU and the SPD. After failing to enter the Bundestag in 2013, the FDP could once again be kingmaker.
Depending on election results, coalition talks could take weeks, if not months. In 2013, for example, it took three months for a coalition government to be negotiated and approved by the parties. Polls suggest that a coalition led by the CDU may only require one more party (potentially the FDP), while a coalition led by the SPD would require at least three. And while another "grand coalition" won't be a priority for the CDU and the SPD, the parties may have no choice but to continue their alliance.
Concerning the Continent
The CDU and the SPD, after all, have markedly different views on how Germany should be run. The conservatives' priority is to keep a balanced budget. The progressives promise to increase public spending. Yet when it comes to the Continent, both parties defend the European Union, Germany's membership in the eurozone and the need for a strong Franco-German alliance. As a result, the German elections won't create an immediate threat to the future of the bloc in the same way that the French elections and the strong showing of anti-establishment parties there did.
But while the German elections won't alter the country's membership in European structures, they will still have an important impact on the European Union. After a decade of crisis, the bloc is once again evaluating a new round of institutional reforms. Many would have the goal of "completing" the eurozone, introducing policies that would make the currency area stronger and better prepared to cope with future crises. But eurozone reform is controversial and exposes the differences between Northern and Southern Europe.
A coalition government including the CDU and the FDP would probably be less willing to accept risk-sharing measures in the eurozone, such as issuing eurobonds (debt issued jointly by eurozone members), increasing EU-wide investment plans or creating a common insurance mechanism for banks in the currency area. A center-right coalition would be wary of giving in to such demands, which would come from countries like France, Italy, and Spain. A center-left coalition led by the SPD, conversely, would be well received in Mediterranean Europe, as it would open the door for the kinds of policies that the region favors. Regardless, the next government in Berlin will accept policies that might compromise Germany's wealth only in exchange for greater European Union control of the economies of Southern Europe.
Deciding German Foreign Policy
Simultaneously, the next government will have to decide its policies concerning the United States. The White House wants Germany to reduce its trade surplus with the United States. U.S. President Donald Trump's administration also wants Berlin to increase military spending, putting it in line with NATO's goal of 2 percent of GDP (Germany's current defense spending stands at 1.2 percent of GDP). A center-right coalition would probably continue to defend Germany's trade surplus, connecting it to the efficiency of German exporters and arguing that Berlin does not control the value of the euro. But it would be more willing to appease the United States by increasing military spending. In recent months, several CDU members have even said that Germany should increase its defense budget.
A center-left government would probably do the opposite: It would likely try to increase public spending and raise the minimum wage, which in theory should lead to an increase in imports and a smaller trade surplus. At the same time, it would try to resist pressure to take military spending to 2 percent of GDP. While the CDU is willing to take a pragmatic approach to the Trump presidency, the SPD's ideology makes frictions with the U.S. president more likely, as the center-left electorate is particularly critical of the White House.
The next German government will also have to decide what kind of relations it wants to have with Russia. The SPD tends to be more supportive of keeping close ties with Moscow than the CDU. During his term as chancellor, former SPD leader Gerhard Schroder (1998-2005) treated Russia as a strategic partner, based on Germany's need for Russian energy and Russia's need for German investment and technology. In that time the Nord Stream natural gas pipeline that connects Russia to Germany was approved. Since the introduction of sanctions against Russia because of the events in Ukraine, former Foreign Affairs Minister Frank-Walter Steinmeier and former Deputy Chancellor Sigmar Gabriel (both from the SPD) have advised keeping communication channels with Moscow open and warned about making decisions that would unnecessarily provoke Russia. Gabriel has also openly defended Nord Stream II, a project to expand the Nord Stream pipeline.
But the CDU is not ideologically against improving Germany's ties with Russia. After all, it was Merkel who opposed Ukraine's accession to NATO a decade ago, understanding how sensitive the issue was for Russia, and who pressed on with the Nord Stream project. Like the SPD, the CDU is also under pressure from business sectors that want to resume exports to Russia and from companies, especially in the energy sector, that wants to participate in joint projects with their Russian counterparts.
No matter who is in charge in Berlin after the September election, Germany will base its policy on Russia on at least three factors. The first is its dependence on Russian natural gas and business ties. The second is Berlin's need to reassure countries such as Poland, Latvia, Lithuania and Estonia of its commitment to their security. The third is German public opinion, a significant part of which is currently critical of Russia, especially on issues such as Ukraine and the allegations of interference in elections in EU countries. A government including the FDP or the Greens could influence Berlin’s policies as well because these parties are critical of energy ties with Russia.
See You in September
With Germany entering campaign mode, many decisions in Europe have been postponed. But once Germany has its new government, those issues — granting debt relief to Greece and eurozone reform, to name a few — will have to be decided. Most EU members are experiencing economic growth again. The years of urgent financial decisions are over. Political questions remain, however. Moderate forces have managed to retain power in a crucial electoral year for the European Union. But the underlying frictions between Northern and Southern Europe, and between Western and Eastern Europe, will have to be addressed if the bloc wants to start healing its wounds after a decade of crisis.
Germany: The Next Stop in the Campaign for Europe's Future is republished with permission from Stratfor.com.
