This Was the Worst Possible German Election for Europe

Angela Merkel’s final term was supposed to revive the EU. Now it might condemn the continent to permanent crisis.

German Chancellor Angela Merkel attends a press conference at the headquarters of the Christian Democratic Union (CDU) party in Berlin on September 25, 2017, one day after general elections.
Merkel woke up to a fourth term but now faces the double headache of an emboldened hard-right opposition party and thorny coalition talks ahead. / AFP PHOTO / Tobias SCHWARZ / ALTERNATIVE CROP         (Photo credit should read TOBIAS SCHWARZ/AFP/Getty Images)
German Chancellor Angela Merkel attends a press conference at the headquarters of the Christian Democratic Union (CDU) party in Berlin on September 25, 2017, one day after general elections. Merkel woke up to a fourth term but now faces the double headache of an emboldened hard-right opposition party and thorny coalition talks ahead. / AFP PHOTO / Tobias SCHWARZ / ALTERNATIVE CROP (Photo credit should read TOBIAS SCHWARZ/AFP/Getty Images)

Angela Merkel will have a fourth term in office, but not the way she wanted. In Sunday’s election, her Christian Democratic alliance polled at historic lows, and she will have to rely on an untested and difficult coalition or govern with an unprecedented minority government. Merkel will also face a much more fractious and angry opposition featuring the right-wing extremist Alternative für Deutschland (AfD), or Alternative for Germany, which made its parliamentary debut as the country’s third-largest party. By contrast, Merkel’s most likely coalition partners, now that the center-left Social Democrats have categorically ruled out participation in yet another grand coalition, placed fourth (the pro-business liberal FDP) and sixth (the Greens).

The result stands in stark contrast to recent elections in France, where Emmanuel Macron received almost two-thirds of the votes in the second round of the presidential contest held last May, and his new centrist party, together with its allies, got just over 60 percent of the seats in the National Assembly. Commentators and policy wonks were quick to point to Macron’s victory as evidence that the populist threat to European democracy had been vanquished. Many even claimed, after the French election, that Paris and Berlin would quickly revive the European Union’s traditional Franco-German engine and initiate overdue reforms to put the continent on a firmer economic and political foundation.

The German election results are forcing a drastic reconsideration of both those assumptions. Although Angela Merkel will return to power, it is under circumstances that will be to Europe’s detriment.

Democracy Without Solidarity

We should first dispel the illusion that the German elections tell us anything about the relative stability of Germany and France. What it does tell us is that electoral institutions matter. The results in France differ only because it has a directly elected president and a second round of legislative elections. If we compare the German elections with the first round of the French legislative elections, the results were pretty much the same. Macron’s centrist alliance and Merkel’s Christian Democrats each emerge with around one-third of the vote; the far right French Front National (FN) and the German AfD around 13 percent; the far left in France gets around 14 percent and in Germany it gets only around 9 percent strictly speaking, though Germany also has a much larger Green Party that is divided between more centrist and more radical elements.

This populist surge weakens democracy in both countries. The entry of close to 100 AfD members in the Bundestag is important in that respect. It isn’t just the negative aesthetics of seeing a xenophobic right-wing populist group gaining significant support in the former home of Nazism; it is the many practical ways that the AfD will influence the functioning of the legislative process and poison the content of Germany’s political discourse. The same goes for the FN in France, both at the national level and in the European Parliament. Political institutions only work if politicians want them to function. But if politicians discover they can profit more from the system by holding it hostage or breaking it to pieces, many will happily disregard the consequences for democracy.

But the more immediate implications of the German elections are going to play out in the European context. Set aside the grand federalist ambitions recently set forth in European Commission President Jean-Claude Juncker’s “State of the European Union” address to the European Parliament. Juncker’s proposals to fuse the president of the Commission with the president of the European Council were never going to happen even under the best of circumstances. Neither was his ambition to create a European finance minister based in the European Commission or to create a permanent budget line for the euro area as part of the Commission’s financial framework. The relative strength or weakness of French and German democracy matter little for such proposals because there is almost no circumstance where they would be in the French or German national interest.

The future reform of Eurozone macroeconomic governance and the consolidation of Europe’s banking union are very different matters. These are policy areas where France and Germany have a vital stake. Both Paris and Berlin want to prevent another crisis in the euro area, and both want to avoid a return of financial fragility. They have differed in the past on how best to achieve those objectives. Traditionally, France placed more emphasis on the exercise of discretion in the context of some kind of European “economic government,” and Germany favored the strict enforcement of a rules-based system. More recently, Macron and Merkel had shown signs of converging on a set of reforms that would trade off solidarity and collective decision-making (sought by the French) for greater national responsibility under European supervision (sought by the Germans). Macron scheduled an important speech to set out his own views on how that convergence should look to follow right after the German elections.

Unfortunately for Macron, the composition of the new German parliament — and hence the most likely new German coalition — pushes in the opposite direction. Merkel may support compromise with the French position, but the right wing of her Christian Democratic alliance is more skeptical and her allies in the liberal Free Democratic Party (FDP) are outright opposed. Moreover, the threat that the AfD would make further inroads into the electorate by criticizing any German concessions to the French on Europe will only harden those positions. Hence, we are much more likely to see continued divergence between German and French positions on macroeconomic policy matters than we are to see any new ambitious drive to reform European governance institutions.

A German Eurozone

The Franco-German divergence will likely manifest itself in five very specific ways. First, Germany will cease to be apologetic for its large trade surpluses. Instead, we will hear more talk about the virtues of German export competitiveness and about the need for other countries — France but also Italy — to follow in Germany’s footsteps of fiscal austerity and structural reform. Second, Merkel IV will be less tolerant of the risks that remain in the Europe’s banking system. Hence, we should expect more pressure on Italian banks to offload their non-performing loans and to cut down on their holdings of Italian government bonds. This emphasis on ‘risk reduction’ will be sold as a virtue in its own right and not as a price to be paid for further concessions on the German side when it comes to “risk sharing” in the Banking Union.

Indeed, and this is the third point, we should expect Germany to resist any efforts to create a common fiscal backstop for European deposit insurance or for European banking resolution. That resistance was always evident in the past and yet the hope was that it would decline alongside a reduction of risks in the European banking system. Such a link is unlikely to materialize. On the contrary, once the risk is reduced, there will simply no longer be any need for Germany to engage in a redistribution of responsibilities across national banking systems. This also applies to the creation of a common European sovereign debt instrument (or “eurobond”) but only more emphatically. The new German Bundestag — the largest ever, with 709 members — will be even less tolerant of the prospect of any kind of European fiscal “transfer union” than the one it replaced.

The remaining two points concern the European Central Bank (ECB). Post-election Germany is going to be even more in a hurry for the ECB to wind up its quantitative easing program and to move beyond the unconventional policy of taxing banks for holding their cash by charging negative deposit rates. It may even push for the ECB to follow the U.S. Federal Reserve in moving to normalize monetary conditions by raising interest rates. This kind of pressure is not likely to result in a radical change in ECB policy; the ECB is, after all, politically independent. But it will have an influence on how much the ECB’s Governing Council wants to push out the boundaries of its own mandate.

German pressure will also eventually translate into a more explicit claim by Berlin on the post of ECB president. This is the fifth and final way the German election will bear on Europe. Before the election, it was widely assumed that current Bundesbank President Jens Weidmann was a strong candidate to succeed Mario Draghi as ECB president in November 2019. Now that pattern of succession has become much more likely.

The implications of these changes in Germany’s position are not immediately problematic. So long as the European economy continues to grow, European countries should be able to offload the risks in their banking systems while at the same time adapting to a gradual reduction in monetary stimulus. They may even be able to undertake the kind of fiscal and labor market reforms that will give them something approximating German-style economic “competitiveness” (assuming that really exists).

The problem is that Europe will be only marginally better able to withstand the next crisis than it was able to handle the last one. It will have some resources to bail out countries and banks under close supervision, but not enough to handle all those that are likely to get into trouble or even to manage the potential crisis in Italy. In the end, a reformed European macroeconomic governance framework and a completed banking union are necessary to tackle such oversized problems. But Europe is unlikely to build out those institutions given the results of the German elections.

Dysfunctional Democracy

The process of forming a so-called “Jamaica” coalition government — named after the party colors of the Christian Democratic alliance (black), Liberal FDP (yellow), and Greens that adorn the Caribbean country’s national flag — is unlikely to be smooth and could well last months. The positions of the liberals and the Greens are often hard to reconcile. The FDP rejects the multiculturalism and open immigration policies the Greens celebrate, while their stances on the economy and further European integration are miles apart. It will be interesting to watch Merkel try to square that circle.

Long and arduous negotiations in Berlin are also bad news for British Prime Minister Theresa May and her unruly band of Brexiteers in London. After her much-anticipated speech in Florence last week, May had hoped to unlock the Brexit divorce negotiations during next month’s EU summit and move on toward discussions of a future “deep partnership” between the United Kingdom and the EU. Merkel is unlikely to be in a position to give Britain the green light by then, leaving Michel Barnier and the European Commission in charge of the details of the Article 50 divorce negotiations. German coalition talks will take time, and time is one thing Brexit Britain does not have, as the Article 50 clock keeps ticking obdurately towards March 29, 2019.

The German voters have spoken, and they are not alone in passing a broadly unfavorable judgment on their ruling elites. The same could be said about France, despite Macron’s centrist victory, as well as the United States of Donald Trump or the United Kingdom of Theresa May and Brexit. The challenge that comes from these kinds of electoral outcomes is that they increase the risk of democratic dysfunction. Institutions matter, but institutions can also be broken.

In turn, such election results lower the resilience both of our political systems and of the economies and societies they are meant to serve. The question is whether politicians can find some way to reverse the course of this kind of degeneration. Angela Merkel is probably the best suited in terms of temperament, experience, and ability to rise to the occasion, even though her new coalition will test her leadership skills to the limit. Institutions do matter, but character and leadership can shape institutions. Let us hope Merkel’s fourth term in office turns out to be her best.

Photo credit: TOBIAS SCHWARZ/AFP/Getty Images

Matthias Matthijs is an associate professor of international political economy at Johns Hopkins University’s School of Advanced International Studies and a senior fellow at the Council on Foreign Relations in Washington.

Erik Jones is Professor of European Studies and International Political Economy and edited a special issue on “Democracy Without Solidarity: Political Dysfunction in Hard Times” that was published earlier this year in Government and Opposition.