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Analysis
Difficulties for Merkel after election win

Difficulties for Merkel after election win

Coalition formation, probably with Social Democrats, will be contorted and confusing

by David Marsh in London

Mon 23 Sep 2013

Several weeks of contorted and confusing coalition negotiations lie in store in Germany after Chancellor Angela Merkel's victory in Sunday's elections. This could bring delays and raise fresh hurdles to measures to reinforce economic and monetary union (EMU).

The most probable coalition partner for Merkel's Christian Democratic Union (CDU) is the opposition Social Democratic Party (SPD), which has backed her euro rescue measures over the last three and a half years. But no one should believe that relaxing austerity in debt-ridden southern countries and mutualising public debt in Europe – policies the Social Democrats have generally supported in opposition – will now suddenly become the official Berlin line.

The German elections have been fought principally on redistributing Germany's wealth and income towards the worse-off at home, not in Europe. Germany's growing concentration on putting its own economic interests first may mean that, paradoxically, the SPD could be a much more troublesome partner in government than in opposition.
Uncertainty in Berlin over structural measures for the euro bloc will increase the importance in the next few weeks of statements on these issues from the independent Bundesbank and the German constitutional court.

The newly-formed anti-euro Alternative party (AfD) did better than expected, but narrowly failed to win the 5% of votes required for parliamentary representation. The AfD, expected to marshal a big protest vote in next May's European election, will remain an important thorn in Merkel’s side.

Adding to complexity, the SPD will be anxious to avoid taking the blame for measures such as expected debt relief for Greece and other peripheral countries that will be unpopular and costly. Considerable importance will be attached to the choice of finance minister who, in a CDU-SPD government, would almost certainly be a Social Democrat, leading to a shift sideways or departure from government for veteran Wolfgang Schäuble, the incumbent. Jörg Asmussen, the German board member at the European Central Bank, a former finance ministry official and Schäuble confidant, is a strong contender for the job.

Merkel's better-than-anticipated victory margin of 16 percentage points over the SPD –taking her to within a few seats from an absolute Bundestag majority – is bitter-sweet. The German leader is at the height of her powers, but in many ways the polling triumph has weakened her. It was achieved at the expense of the demise of her coalition partner of the last four years, the liberal Free Democrats (FDP), which failed to win election to the Bundestag for the first time in post-war Germany.

The SPD will probably move to the left after its defeated candidate, former finance minister Peer Steinbrück, retires from frontline politics as expected. With the CDU’s voting lead over the SPD now the highest since 1957, many Merkel supporters within and outside parliament will be bitterly reluctant to make concessions to the SPD. The Social Democrats, for their part, which saw their support fall sharply during the last Grand Coalition under Merkel's leadership that ended in 2009, will approach coalition negotiations with scepticism and suspicion.

Purely arithmetically, the SPD could form a coalition against Merkel with the support of the Greens and the far-Left party, which both saw their voting shares fall in yesterday's poll. Although the Social Democrats have ruled out an alliance with the far Left, some party activists are bound to see this as a powerful potential antidote to Merkel's ascendancy.

The SPD looks likely to expand further its majority in the upper house of parliament, the Bundesrat. This follows the failure of the CDU-FDP regional coalition to maintain its majority in an important state election in Hesse yesterday, probably depriving the CDU of power in that state.

On the euro front, two-thirds of Greece’s government debt is owed to official creditors abroad, including various European rescue funds as well as the European Central Bank. So probable debt restructuring for Athens will for the first time require taxpayers from euro members to take losses, both directly and indirectly (through the need to compensate for the losses taken by central banks). This would be a highly unpopular outcome in Germany, which Merkel so far has made every effort to play down.
The other principal European countries subject to emergency credit programmes, Portugal and Ireland, will almost certainly require further official credits next year and may demand, too, a softening of debt conditions.

In coming months, the present favourable German economic picture of low inflation, low unemployment, low interest rates and reasonable economic growth is likely to give way to a less propitious environment. The present conjuncture marks Merkel’s golden age. From now on, it all gets much more difficult.

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