With less than a week to go until the German election, Chancellor Angela Merkel is poised to secure her fourth consecutive term in office. However, there is still much to be decided as rival parties look to capitalize on the Chancellor’s withering support.
The composition of the German Bundestag after the September 24 election will have profound implications on the Eurozone economy. Depending on the alliance that forms the government, we could be headed for greater Eurozone integration or more of the status quo. The path Germany takes could come down to the coalition partner, or partners, Merkel’s CDU/CSU leans on.
Most polls show a clear victory for the Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU). The Social Democrats (SPD) headed by Martin Schulz are a distant second. The most intriguing development in the race is the rapid rise of the Alternative for Germany (AfD). The far-right nationalist party is Germany’s version of Eurosceptic populism. After making strong inroads in state elections, AfD is poised to make waves on Sunday. The party is projected to finish third in the election, which would mark the first time in over half a century that a far-right party has had representation in German parliament.
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Germany and the Future of the Eurozone
The future of Eurozone integration could depend on the outcome of Germany’s election. To say that Germany is the main engine of the euro area would be a huge understatement. The federal republic accounts for roughly one-third of Eurozone gross domestic product (GDP), and a significant share of its manufacturing base. It is also the chief paymaster of recently rescued nation states, such as Greece. This gives Germany tremendous power in setting the pan-European project. As the recent Greece debt saga demonstrated, not everyone is happy with Berlin’s overarching presence in European politics.
Martin Schulz is said to support greater European integration, and will likely seek greater influence over Eurozone policy should the unlikely alliance between CDU/CSU and SPD continue. Merkel’s camp would prefer to keep a coalition government propped up by a smaller party like the Free Democrats (FDP), which joined Merkel’s CDU-led government between 2009 and 2013. This partnership has also been the most frequent since the Second World War. Unfortunately, Merkel’s sliding poll numbers and SPD’s steady base could prevent the CDU/CSU from joining forces with a smaller party like the Free Democrats.
Analysts say that a coalition with the Free Democrats would be best for the economy, given the FDP’s pro-business platform. It would also support Finance Minister Wolfgang Schauble’s campaign to hold Eurozone member states accountable for shoring up their economies. In other words, a smaller coalition for the CDU/CSU makes it easier for Merkel’s camp to press forward with the status quo.
However, an FDP-CDU alliance is the least likely to materialize based on current projections. The more likely outcome is the continuation of the grand coalition with the SPD.
Of course, an AfD victory, no matter how unlikely, would blow the doors wide open on the Eurozone. Like its populist brethren in France, Italy, the Netherlands and elsewhere, AfD is looking to scrap Eurozone integration in favor of greater sovereignty.
The outcome of the German vote could also impact upcoming elections throughout the region. Italy, Sweden, Finland and Ireland are all scheduled to hold elections next year. Italy’s Five Star Movement is widely regarded as a front-runner in the upcoming election after Matteo Renzi’s failed attempt to reform the constitution forced him to resign from the post of Prime Minister.
Italy didn’t budge on constitutional reform last December, triggering a chain of events that could prove costly for the country’s Europhiles. Read about the domino effect that a so-called ‘Quitaly’ might have here.
Populism is spreading throughout the region, as more Europeans contest the status quo. An ongoing migrant crisis has fanned controversial debate over the success of multiculturalism and the need to restrict immigration. The desire to curb migrant flows was a major rallying cry for Britain’s Vote Leave as it campaigned to exit the European Union (EU). A similar call is now being heard across the region as countries struggle to contain the mass migration from Africa and the Middle East.
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The Bottom Line
Barring a clear-cut majority for Merkel, deal-making is likely to begin immediately after the September 24 vote. That’s when the powers that be will start exploring what the policy agenda for the world’s fourth-largest economy will be.