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Europe the Morning After the German Elections

Thursday, October 3, 2013

Angela Merkel’s impressive reelection win indicates little will change in Germany’s Europe policy.

For much of the past year, ever-optimistic European policymakers entertained the hope that there would be a radical easing in German policy towards the European sovereign debt crisis following that country’s federal elections. Now that those elections have come and gone, a rude reality is about to dawn on them. The election results indicate that little will change in Germany’s European policy. As a result, European policymakers should brace themselves for the same pattern that we have experienced over the past three years, with the European economy lurching from one crisis to the next without any permanent strategy to resolve Europe’s long-lingering sovereign debt crisis.

With their economies mired in the very deepest of economic recessions, southern European policymakers hoped beyond hope that following the elections, Germany would pursue a much softer policy line towards Europe’s troubled economies. Among their hopes was that German Chancellor Angela Merkel would back off from her insistence that countries needing International Monetary Fund (IMF) or European Union (EU) bailout support must commit themselves to a policy of severe budget austerity and painful structural economic reform, even at a time of a deep economic recession. They also hoped that Germany itself might pursue more expansive economic policies at home that would lift the European periphery and that Germany might become more receptive to the idea of a swift move to a European banking union that could shore up southern Europe’s extremely rickety banking system.

A striking feature of the German electoral campaign was how little that campaign was focused on a serious discussion of the European sovereign debt crisis.

The fact that European policymakers clung to the hope of radical European policy change during Germany’s election campaign is an extreme example of cognitive dissonance. A striking feature of the German electoral campaign was how little that campaign was focused on a serious discussion of the European sovereign debt crisis. In particular, Chancellor Merkel certainly did not seek a mandate from the German electorate for any change in her cautious and strict European policy, which has resonated so well with the German electorate. Instead, when the European economic crisis was discussed, the Chancellor portrayed herself as a safe pair of hands to deal with the European debt crisis without compromising the German taxpayer.

Merkel’s resounding victory in the election puts her in the driver’s seat in terms of formulating Germany’s European policy. Her party won an impressive 42 percent of the vote and came tantalizingly close to an overall majority in the Bundestag, Germany’s lower legislative chamber. This makes it highly improbable that in her third term as chancellor she will relax the fiscal austerity that she has demanded from those countries in the European periphery that have had to be bailed out with IMF and EU money. It also makes it highly improbable that she will support a more rapid move to a European banking or fiscal union until she is fully satisfied that the conditions are in place to allow such a move to be undertaken without compromising Germany’s finances.

Despite her electoral triumph, Chancellor Merkel is now being forced to negotiate a “grand coalition” with a reluctant Social Democratic Party, especially since her own party does not have control of Germany’s upper legislative chamber. Judging by initial pronouncements from senior Social Democratic leaders, those negotiations are likely to be protracted, which could put overall European policymaking on ice for the next few months. However, once the coalition is eventually in place, one would think that Merkel will dominate it given her very strong electoral showing. A further reason for not expecting much change in Germany’s policy towards Europe is that over the past few years, the Social Democrats themselves have been broadly supportive of Chancellor Merkel’s cautious approach to the European sovereign debt crisis.

It highly improbable that Chancellor Merkel will support a more rapid move to a European banking or fiscal union.

In the months ahead, Europe will face many challenges that will allow us to determine whether Chancellor Merkel will indeed continue with her past policy of dealing with European crises on a case-by-case basis. We will also see whether she continues doing just enough to defuse each crisis without doing enough to prevent the next one. Among those challenges are Greece’s need for a third bailout package and for official debt relief, Portugal’s probable need for a second bailout package, and Italy’s likely need for official support should its fragile government fall. In addition, before the end of the year Chancellor Merkel will need to deal with European policymakers’ push for a clearer and speedier timetable towards a European banking union.

One more challenge that Chancellor Merkel may soon have to face is a ruling by Germany’s constitutional court on the European Central Bank (ECB), which the court had postponed till after the German election. At issue is whether the ECB’s pledge to buy unlimited quantities of the European economic periphery’s debt as needed to save the euro is consistent with Germany’s constitution. Should the court place any limits on the ECB’s freedom of action, a main pillar of support to stabilizing the euro could be undermined.

There are occasions when elections mark a sharp break with the past. Sadly for Europe, Germany’s latest election was not one of those occasions. Instead, Europe should brace itself for more of the same policy prescriptions from Germany. This is all too likely to leave the European economy in its current depressed state for many years to come.

Desmond Lachman is a resident fellow at the American Enterprise Institute.

FURTHER READING: Lachman also writes “The European Central Bank’s Clay Feet,” “Angela Merkel’s Cypriot Headache,” “Do We Really Need More Large-Scale IMF Lending?” and “Is Ireland Really Europe’s Poster Child?” Stephan Burklin contributes “The Question the German Elections Won’t Answer” while Jonah Goldberg examines “What’s So Great About Coalitions?” James Pethokoukis asks “Has Austerity Been Good for Europe?” and “Cheap Labor and Greater Exports: Does the German Model Provide a Blueprint for U.S. Economic Renewal?

Image by Dianna Ingram / Bergman Group, Photo by 360b / Shutterstock.com

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