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Analysis
Coalition doubts in Berlin

Coalition doubts in Berlin

France waiting for EMU action

by David Marsh in London

Thu 11 Jan 2018

The booming German economy has been effectively decoupled from political confusion in Berlin over forming a new government after last September's inconclusive elections – but doubts are rising on how long this will last.

Bundesbank President Jens Weidmann says heady German GDP growth – 2.6% last year and an estimated 2.5% in 2018, driven by external demand boosting domestic investment and consumption – will decline thereafter because of capacity problems and labour supply shortages.

Weidmann's prognosis stresses the need for measures to increase Germany's underlying growth rate. But such firm policy action is likely to be lacking unless a new government is formed soon showing purpose on the economic front.

Lack of German progress is creating dissatisfaction in France, where President Emmanuel Macron is waiting for concrete reactions to his ideas for reinforcing economic and monetary union. Macron's plans could cost considerable sums for Germany's economy, but would shore up its long-term export base in Europe.

Emphasising underlying tensions in EMU, the Bundesbank's claims on the European Central Bank under the Target-2 internal settlements mechanism rose by €51bn in December, the biggest monthly increase for three years, to a record €907bn. That figure is more than €150bn above the crisis level seen in August 2012.

The new surge reflects investors selling government bonds to European central banks under the ECB's quantitative easing programme, and then depositing the proceeds in Germany rather than in southern Europe.

Leading French figures speak of Germany's inherent difficulties in marrying political fragmentation with its proportional voting system, as well as a trend towards 'provincialism' out of keeping with Berlin's international responsibilities.

A conflict is building over the possibility of Germany proposing Weidmann as the next ECB president after Mario Draghi steps down in November 2019. This runs counter to ideas in Paris and other capitals.

Chancellor Angela Merkel's centre-right Christian Democratic Union-Christian Social Union grouping and Martin Schulz's Social Democratic Party (SPD) are trying to forge a new variation of the 'grand coalition' in force since 2013.

Coalition soundings started on Sunday with cautiously optimistic statements on both sides, following November's collapse of talks on an ambitious alliance between the CDU/CSU, the liberal Free Democratic Party and the Green ecology party.

Merkel and Schulz have pledged to end preliminary talks by Friday. Formal negotiations would start soon afterwards. Pending laborious party approval procedures, a government could be in place by early April.

In view of deep-seated differences over finance, Europe, energy, migration and social security, coalition-building could easily break down. The CSU and SPD have hardened ideological positions, with the CSU calling for a 'conservative revolution' and massive restrictions on asylum seekers, and Schulz urging generosity for migrants, higher incomes for the worse-off and a hugely improbable 'united states of Europe'.

All putative coalition partners are combating internal discord, leadership doubts and skirmishing with the far-right Alternative for Germany (AfD). The SPD is demanding, as the price for a Merkel deal, the German finance minister post. This would be welcomed in France but opposed by many German conservatives.

A renewed CDU/CSU-SPD coalition would make the AfD – the first far-right party in the Bundestag since the early 1950s – Germany's formal political opposition, adding to its range and influence.

If coalition talks stumble, this could confront Germany either with an unstable Merkel-led minority government, or new elections in early summer for which the CDU/CSU could replace Merkel as leader. Opinion polls put German electoral support for a new CDU/CSU-SPD alliance at a mere 52%, with resistance above all from SPD supporters.

Britain's European Union withdrawal is contributing to uncertainty. Leading German politicians believe that, with the UK outside, Germany will come more under the control of France and other 'southern' countries. This could bring increased state intervention, protectionism, criticism of Germany's monetary and financial leanings, and siphoning off of German surpluses and savings to support European policies.

Philip Hammond and David Davis, Britain's chancellor of the exchequer and Brexit secretary, touched on such German fears in separate Berlin and Munich visits on 10 January. In a joint article in the Frankfurter Allgemeine Zeitung, they write, 'It makes no sense to either Germany or Britain to put in place unnecessary barriers to trade in goods and services that would only damage businesses and economic growth on both sides of the Channel.'

David Marsh is Chairman of OMFIF.

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