Merkel fragility after coalition vote

UK compromises pale against Europe’s big issues

Angela Merkel, Emmanuel Macron and Theresa May, the German, French and British leaders, share a common fate. To take a phrase from May’s Friday speech defining the UK’s approach – in refreshingly realistic terms – to leaving the European Union, none of them ‘can have exactly what we want’ in forthcoming searches for compromise over the future of Europe.

Merkel, still Europe’s pivotal leader, has won important breathing space with Sunday’s announcement of a relatively grudging Yes vote prolonging the Berlin ‘grand coalition’ – by 66% to 34% – from the 460,000 members of her junior partners, the Social Democratic Party (SPD).

The German chancellor is in a more fragile position than many realise in dealing with challenges ranging from the confrontation with the US over international trade to dangers to the euro from a weak and eurosceptic-leaning government in Rome after Sunday’s elections.

The painful compromises Britain and the other 27 EU members face over the UK’s withdrawal will be small compared with the larger decisions Germany, France and the rest of Europe must take to bridge intractable divisions over the EU’s wider future.

Political fragmentation and proportional representation, combined with many citizens’ complaints about being left behind in the economic recovery, have left the continent in a delicate state to withstand the ending of the European Central Bank’s ultra-accommodative monetary policies.

The government at last being formed in Berlin following September’s inconclusive German elections will feature many new faces, from both Merkel’s conservative Christian Democrat/Christian Social Union grouping and the SPD.

Hitherto unknown German ministers will be anxious to prove themselves as upholding the interests of their domestic constituents. They will be much less interested in grandiose plans for renewing Europe in line with Marcon’s ambitious ideas for a European finance minister, a euro area budget and a reinforced bail-out mechanism for countries that get into trouble.

On the UK issues, Michel Barnier, the European Commission’s chief negotiator, overstepped the mark but also did May a considerable favour on 28 February. His clearly one-sided text setting down the Commission’s interpretation of what has so far been agreed with the UK over the detailed terms of withdrawal proposed a ‘common regulatory area’ for a single market linking Northern Ireland and the rest of the EU.

Barnier gave May a welcome means to play down her own obfuscation over Northern Ireland and unite her Conservatives – and other parts of the country – behind her protest that he was breaching British sovereignty by proposing an unacceptable ‘break up’ of the UK’s own common market.

As reaction to May’s EU speech on Friday has shown, she has defused a potential parliamentary split over remaining in the EU’s customs union. Instead, she has built the useful diversionary tactic of proposing the options of as a ‘customs partnership’ or a ‘highly streamlined customs arrangement’ to minimise trade frictions in a future deal.

Such an accord could fulfil the wishes of Remainers within both the Conservative and Labour parties. Supporters could include Brexiteers like Lord David Owen, the former foreign secretary, who has called for Britain to remain a member of the European Economic Area in a ‘transition option’ under the terms of ‘a well understood international treaty with its own legal framework’.

These important technicalities pale into insignificance compared with bigger question marks over the single currency’s future stemming from rising euroscepticism in the euro area and divisions over the future role of European institutions including the ECB.

Mario Draghi, the ECB president, who is stepping down at the end of October 2019, is calling for unity behind the pending controversial appointment of Luis de Guindos, the Spanish finance minister, to join the ECB executive board in May.

This is merely a prelude for the much more fraught question of whether Jens Weidmann, the Bundesbank president, will replace Draghi next year – which could propel ‘debtor versus creditor’ divisions within monetary union to the decision-making heart of its central institution.

David Marsh is Chairman of OMFIF.

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