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Analysis
German fight over Schäuble largesse

German fight over Schäuble largesse

Merkel, Schulz, ECB fate in the balance

by David Marsh in Berlin

Thu 18 Jan 2018

The battle to form the next German government has replaced squabbling over Britain's European Union exit as the most intense series of skirmishes across Europe. Coalition-formation under arduous preparation in Berlin and elsewhere provides the key to whether Germany will meet French President Emmanuel Macron's polite yet insistent requests for reinforcement of economic and monetary union before near-inevitable tests from the next financial crisis.

Talks on re-establishing the alliance between the conservative Christian Democratic Union/Christian Social Union grouping and the Social Democratic Party (SPD), both under weakened leaders, will determine much more than Chancellor Angela Merkel's future.

On the outcome hinges, too, Germany's medium- and longer-term economic resilience, the euro area's ability to withstand possible shocks from Italian political upheaval, and the European Central Bank's direction, potentially under a German president after Mario Draghi leaves in November 2019.

Immediate next steps focus on whether Martin Schulz, the lacklustre SPD chairman, can win party support at a special congress in Bonn on 21 January for formal talks with the CDU/CSU. He has to surmount the hurdle of a vote by its 400,000-plus members.

Merkel is playing for high stakes over a coalition agreement. She has most to lose from not getting an accord with the SPD. Schulz appears to be terminally weakened whatever happens, whereas, if Merkel gets a deal, she can soldier on.

Many in the SPD oppose a re-established 'grand coalition', preferring entry into opposition against Merkel rather than laboriously assembling another partnership. This was Schulz's own initial view, subsequently reversed, after the SPD's disastrous showing in the 24 September parliamentary elections.

Typical for Schulz's uneven style, he has attracted scorn with a badly understood call for a 'united states of Europe' by 2025. Many believe Schulz is so damaged that he – like Merkel – is no more than an interim chief, pending new leadership. If coalition-building breaks down and Germany faces new elections, both Merkel and Schulz could be gone in just a few weeks.

More positively, the SPD can emphasise success in pushing through key demands on pensions, social security and European affairs in draft coalition proposals after all-night haggling in Berlin on 12 January.

Under SPD plans, Sigmar Gabriel, former party leader and foreign minister under Merkel, would become finance minister. He would end eight years of tough policies under Wolfgang Schäuble, the incumbent up to October 2017, acceding to French recommendations for strengthening EMU with a euro area budget to support weaker countries and overcome economic shocks. Peter Altmaier, Schäuble's CDU colleague and caretaker finance minister, is a genial deal-maker with little interest in economic intricacies. He has already started to move away from Schäuble's more rigorous principles.

Although the party is cautious about setbacks, the SPD is tempted by an unusual opportunity to spread across Germany and Europe an estimated €60bn of budgetary largesse amassed at the finance ministry after the Schäuble era of tight budgets, low interest rates and buoyant tax receipts.

Under SPD direction, the finance ministry could even advance a left-wing candidate to replace Jens Weidmann, the Bundesbank president, when his eight-year mandate ends in April 2019.

Such a person amenable to Paris would have a better chance of succeeding Draghi at the ECB, fulfilling wishes across Germany to place a German at the helm of Europe's foremost decision-making institution. Hitherto, Macron has told Merkel that a German ECB boss is highly improbable, not least since conservative-leaning Germans head three important European organisations – the European Investment Bank, Single Resolution Board and European Stability Mechanism.

The 12 January policy document from CDU/CSU and SPD leaders is long-winded and ambiguous. The 28-page paper is a long way from opening 'a new dawn for Europe' as Merkel claimed. Lofty statements crafted to win plaudits from Macron are hedged by caveats negating their significance. The parties say they are 'ready' for higher German payments into the EU budget, but then state, in a phrase oft-used by the Bundesbank, that member states' obligations must be linked to 'responsibility for risks'.

Seemingly far-reaching proposals for extending the European Stability Mechanism into a 'European monetary fund' under EU law 'controlled by parliament' leave open the delicate balance between the European and German parliaments. The ECB has already rejected the phrase 'monetary fund'.

Schäuble, now president of a fractured and fractious Bundestag, will ensure extravagant EU spending plans do not countermand German parliamentary prerogatives. With the CDU/CSU-SPD majority much reduced, the far-right Alternative for Germany the next biggest group, and three other parties vying for attention, the 75-year old veteran will need all his experience to maintain control.

David Marsh is Chairman of OMFIF.

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