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Analysis
Merkel’s ebbing power boosts May’s EU leverage

Merkel’s ebbing power boosts May’s EU leverage

German right-wing split, Social Democrat opening 

by David Marsh

Mon 5 Sep 2016

German Chancellor Angela Merkel’s ebbing power further complicates the European Central Bank’s growth policies and strengthens Britain’s negotiating leverage in the psychological and economic battle over the UK’s European Union withdrawal.

The anti-immigration, anti-euro Alternative for Germany (AfD) yesterday forced Merkel’s ruling centre-right Christian Democratic Union into third place in elections in the idyllic yet relatively impoverished eastern state of Mecklenburg Vorpommern.

Merkel’s humiliation in her electoral home region, especially the rejection of her liberalism on refugees, gave victory to the Social Democrats, the chancellor’s Berlin coalition partner, gearing up to oppose her in next autumn’s general election.

Her rebuff provides Theresa May, the British prime minister promoted by the UK’s June anti-EU referendum, with a chance to warn European leaders they will be dislodged by voter unrest unless they bring in EU reforms including immigration curbs.

Wolfgang Schäuble, Germany’s acerbic yet popular finance minister, in remarks made public four months ago, pinned half of the blame for the AfD’s rise on ECB chief Mario Draghi’s loose monetary policies. This strong German anti-ECB feeling, running through all sections of society, overshadows the next ECB governing council meeting on 8 September, which will review its drawn-out policies on negative interest rates and large-scale bond-buying.

Some on the council would like to extend the bank’s quantitative easing bond purchases beyond the March 2017 cut-off. But the AfD’s rampant performance supports the stance of creditor country central banks, led by Germany, the Netherlands, Austria and the Baltic states, in opposing any new action.

With Merkel under pressure, May’s pragmatic line on ‘Brexit’, elaborated at and around the weekend G20 summit in China, may find ready support in Berlin, a significant boost for the UK’s negotiating tactics. May’s desire to maintain European single market access will have been bolstered by US and Japanese G20 statements on the importance of UK-EU trade openness.

The AfD took 20.8% of the vote in Mecklenburg Vorpommern against 19% for the CDU, whose score was down from 23% in 2011. The SPD recorded a better than forecast 30.6%, down from 35.6% five years ago.

Leif-Erik Holm, the AfD’s lead candidate in Mecklenburg Vorpommern, termed the result ‘the beginning of the end of the chancellorship of Angela Merkel’.

Merkel’s losses in the east constrain her manoeuvering room in the run-up to the 2017 general elections. In Germany’s decentralised, proportional representation-based political system, her reverses give further power to two groups which are nominally her allies in the Berlin coalition but are actually rivals and opponents.

The Christian Democrats’ right-wing partners in the conservative southern state of Bavaria, the Christian Social Union, can now force restrictions on Germany’s unpopular immigration policies as a condition for backing Merkel as a candidate in the 2017 poll.

The growing likelihood that the AfD will win seats in the Bundestag, the national parliament, next autumn would massively split the right-wing vote. This may give Sigmar Gabriel, the SPD leader who has conspicuously opposed Merkel on both trade and immigration, a chance of edging into the chancellorship next autumn at the helm of a left-wing coalition.

Merkel’s defeat could be welcome in many European countries seeking relaxation of German-led economic discipline widely, yet erroneously, blamed for impeding growth across the continent.

One result of the poll will indeed be to weaken further the resolve of Germany and other creditor countries to impose budgetary targets on recalcitrant economically pressed states, including France, Italy and Spain.

This is in line with a gathering retreat for German-inspired fiscal orthodoxy across the euro area and beyond. Jack Lew, the US treasury secretary, said before the G20 summit that the world’s leading economies were now collectively backing a longstanding American campaign to give priority to fiscal stimulus over austerity.

Yet a strong reason for the rise of the AfD – widely scorned as irrelevant when it was formed 3½ years ago, yet with seats now in nine of Germany’s 16 regional parliaments – has been voter distaste for euro policies, especially the ECB’s easy money stance. So Germany’s far-right renaissance hinders rather than assists longer-term structural efforts to overcome Europe’s economic imbalances through greater policy cohesion, debt restructuring and transfers to help indebted southern states.

David Marsh is Managing Director of OMFIF.

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