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New German party hardens Berlin’s stance on euro

New German party hardens Berlin’s stance on euro

Alternative for Germany buttresses Bundesbank role
Challenge for Merkel, despite her popularity

by David Marsh

Mon 15 Apr 2013

Intensifying political and economic strains in the euro area are driving German Chancellor Angela Merkel towards increasingly hard-line policies on the single currency, just at the time when many euro advocates are calling for more German flexibility to save Europe from another bout of summer currency jitters.

Yesterday saw the formal inauguration in Berlin of Alternative for Germany (AfD), an anti-euro party which intends to contest the 22 September German elections. Just two months after its first public meeting, it says it has more than 7,000 members.

Led by a softly-spoken 50-year-old economics professor, Bernd Lucke, AfD adds further to the fragmentation of German politics. By challenging the increasingly frayed conventional wisdom that the euro has been a success for either Germany or other countries, the party is likely to amount an important challenge to Merkel, even though the German chancellor is well ahead in the polls and easily the most popular politician in the country.

On the financial markets, the main significance of the surge in media interest in the new anti-euro grouping is that it strengthens the hand of Jens Weidmann, the Bundesbank president. Weidmann has constantly advocated a tough line against state bail-outs in Europe and opposes the Outright Monetary Transactions (OMT) programme unveiled by the European Central Bank in summer 2012 for purchasing bonds of hard-hit countries – a plan yet to be put into effect that seems increasingly unlikely ever to be used.

European bond yields have continued to fall in recent weeks in spite of considerable economic uncertainties in Europe, as European markets have been swamped by the effects of heavy-duty quantitative easing in Japan and the US. However once the US and Japanese operations tail off or meet substantial resistance, it seems only a matter of time before Europe is hit by another bout of tension over the sharp gap in economic performance between creditor and debtor countries.

AfD will be of significant nuisance value before the September poll but seems highly unlikely to gain the 5% of votes necessary to win seats in the Bundestag. All the same, by taking away more votes from the right than the left, even if his group wins only 3-4%, Lucke could threaten Merkel’s majority in parliament. She at present relies on support from her coalition partner, the liberal Free Democratic Party, which may not be strong enough to enter the Bundestag in the autumn.

Prof. Michael Stürmer, one of Germany’s best-known historians and a member of the OMFIF advisory board, says in the daily German newspaper Die Welt today that Lucke is a 'game-spoiler' for Merkel but not a 'game-changer'. Significantly, despite the disarray shown by the Merkel government over the botched Cyprus bail-out package last month, her CDU/CSU conservative grouping has moved up to 41% of support in latest opinion polls, an advance that many say is due to her uncompromising insistence that depositors in Cypriot banks rather than European taxpayers put up extra funds for the latest rescue package.

The AfD opposes the euro as the single European currency and has proposed a strategy for its gradual phasing out and replacement either by national currencies or by smaller regional blocs, with the euro possibly remaining in place as a common or parallel currency. There are echoes here of the UK Treasury's celebrated but mistimed 'hard ECU' parallel currency plan put forward in 1990 while Europe was making up its mind on monetary union.

Lucke, a full-time economics professor at the University of Hamburg since 1998, is a clear-thinking, sober-sounding father of five devoid of celebrity appeal. His party apparatus appears populated by down-to-earth German people including a fair share of relatively young women – a combination that may add to grass-roots attraction in a country that has been suspicious of rabble-rousers since the Second World War.

Lucke’s academic and political background counters the impression that he represents right-wing radicalism. He was a member of Merkel’s CDU for 33 years, initially favoured the euro but changed his mind three years ago with the European bail-out of Greece. He calls for an end to the various rescue packages for euro members, saying the extremely large falls in real wages demanded by austerity is incompatible with democracy and is dividing Europe. He disagrees with Chancellor Merkel's view that 'if the euro fails, Europe will fail' saying that the euro could be phased out without any long-term harm to Europe.

Lucke has an undergraduate degree in economics, history and philosophy from Bonn university, carried out postgraduate studies in economics at Berkeley and has a PhD in applied microeconomics at the Free University of Berlin. Lucke’s primary research interests include sovereign default, news-driven business cycles, growth in developing countries, dynamic computable general equilibrium (CGE) models and applied econometrics. In coming months, at least on German TV programmes, he will become a household name.

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