The long-term nature of German elections
Golden scenario for Merkel may not last
by David Marsh
Mon 19 Aug 2013
German parliamentary elections are less about ejecting government leaders, more about establishing grand and persistent political trends. We will almost certainly see a similar pattern on 22 September in the German federal election.
Chancellor Angela Merkel, in power since 2005, seems 90% likely to be returned as Germany's leader, on track to become the country's third longest-serving chancellor (after Helmut Kohl and Konrad Adenauer) since 1949. But Germany's welcome political stability doesn't mean that the election outcome will have no impact on financial markets.
The lesson of recent decades is that European financial problems arise not during times of general economic stagnation, but instead coincide with periods when Germany is growing at a significantly higher rate than its peers. German elections, too, often have a significant impact on the continent's financial fortunes. So the ending of the 18 month-long euro area recession signalled by European statistics last week is not unequivocally good news for the overall health of the single currency.
If German economic conditions demand higher interest rates in the core country of the euro, at a time when much of the rest of the continent is still stuck in a downturn, then that will be another big test for euro cohesion.
Positive economic figures, and near-full employment in Germany, give Merkel a considerable fillip. The opposition Social Democrats, campaigning under former finance minister Peer Steinbrück, are struggling in the opinion polls, reflecting voters dislike of their leftwards tilt in economic policies and particularly their pledge (although softened in recent days) to increase taxes.
Merkel's reign looks set to continue either at the helm of the present coalition between her conservative Christian Democrats with the liberal Free Democrats (the most likely outcome), or in a Grand Coalition with the Social Democrats. That would probably happen if the Free Democrats fail to reach the threshold of 5% of votes needed to secure parliamentary representation.
A likely Merkel triumph would confirm the generational tendencies that sweep across German politics. A two-decade spell of Christian Democrat dominance after 1949, mainly under Konrad Adenauer, gave way to 13 years of Social Democrat stewardship between 1969 and 1982 - and then 16 years of Chancellor Kohl. Gerhard Schröder, the Social Democrat leader who presided over Germany's successful economic restructuring a decade ago, was in power for seven years. Merkel looks likely now to chalk up at least a decade of political leadership, entering the history books for longevity behind Kohl and Adenauer.
But there will be little time to enjoy the victory champagne. On the euro bloc, Germany is deliberately postponing until after the election any deliberations on long-running problems, particularly on a further write-down of government borrowing totals for Greece (and possibly other hard-hit European debtors) to fulfil the International Monetary Fund's conditions on debt sustainability for these countries.
Merkel and her allies seem to be banking on US growth and, no doubt, a stronger dollar (helping European exports, as was the situation in the late 1990s just before the euro came into force) to help out the European economy. That's optimistic, to say the least.
In the past, German elections have represented turning points for financial markets. The landmark D-Mark revaluation of 1969 took place just after an election, leading to the demise of Kurt-Georg Kiesinger as chancellor. Kohl's confirmation in the March 1983 election was followed by a major realignment in the European Monetary System. Another D-Mark revaluation took place just before the January 1987 poll. Another Kohl win, in the first elections for united Germany in 1990, was followed by the spending excesses on German unification that led directly to the foreign exchange upsets of 1992-93. Schröder's second victory in 2002 paved the way for his Agenda 2010 policies that eventually exposed the competitive gulf that was opening up, unseen by many observers, in the euro bloc.
This time may be another watershed. Leading German ministerial figures (and the Bundesbank) are speaking privately about an inconvenient truth - the need for a further Greek write-down in 2014 - where both the European Central Bank and other central banks would have to take a hit on their holdings of Greek bonds.
Merkel goes into the election the clear favourite, and Germany's economic performance is providing strong backing to her candidature. Low inflation, low interest rates, low unemployment and reasonable growth represent a dream scenario for re-election. In a year or so, and depending on how the Germans react to the coming Greek write-down, the environment may look a lot less benign.
David Marsh, chairman of Official Monetary and Financial Institutions Forum, is the author of 'Europe's Deadlock How the Euro Crisis Could be Solved - and Why it Won't Happen' (Yale University Press). click here
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