Merkel did it again. Another grand coalition between Conservatives and Social Democrats is sealed and will rule Germany for the coming 4 years – should not the youth organization of the Social Democrats be able to mobilize members to reject the coalition contract. While most political commentators are proclaiming the victory of the Social Democrats and the beginning descent of Angela Merkel, I would recommend not to write her off, yet. It is not the first time, that observers and commentators are underestimating her political skills and her brutal instinct for power. Like it or not, Germany has developed into the European powerhouse over the last 12 years of Merkel’s rule with by far the strongest economy and industrial basis, practically no unemployment, budget surplus, and a high reputation in the World. And while Trump and Macron will enter into the competition of the biggest military parade (chased by Putin and Kim), she will continue to do her job, perhaps not at high speed, but silently and steadily. Here are the takeaways what this Government will mean for Germany and the World:
- Tax Inertia: Do not expect any tax improvements for corporations or the middle class. All will stay as is. Luckily positive economic development in Germany with higher salaries and record employment will make the giant exploitation of the performers less obvious. And Germany can save some fiscal ammunition for tougher times.
- Spendaholics: Social Democrats have pushed and will further bloat a costly social spending program, that will reach nothing but appease their traditional clientele, that is dreaming of more money for less work. What a pity that this money will not be spent on infrastructure developments, universities, and future industry clusters. Good news for private consumption.
- Reflation: Germany will be one of the first countries in the EU to experience wage-driven inflation. With record employment and high growth, Germany is finally set to adjust its salary levels (Goldman Sachs is recommending 9% increase!). Less competitive neighbors will welcome this development. But beware an already stretched real estate market, and a possible simultaneous increase of interest rates, stronger dollar or energy prices, and we will experience a dangerous cocktail.
- Survival: Bravo! With Mutti’s help, the Left in Germany survived and has a new lifeline. It will keep key power positions in the new Government. However, it has to be seen, whether the Left will use this opportunity for renewal or whether the deadly embrace of Merkel will deal them the final blow within the next four years.
- Strength: The new Cabinet of Ministers is strong and experienced. It will do a better job than many expect. Against all odds, it was a great move of Merkel to give the Social democrats the Finance ministry (this will restrain the spending spree of their own party) and the Interior Ministry to the Bavarian Conservatives (this will put them in charge on the controversial refugee topic).
- Stability: Germany will see a stable Government for the coming years. There is a solid majority in Parliament, the actors know each other well from many years of political work, and in major political areas they share identical views. Potential disruptive elements will be the youth organization of the Social Democrats (who are closer to Corbyn than Schulz), the liberal-conservative and business wing of the conservative party, which will cry for innovation, tax reform and liberalization and finally the far right AFD, which will exploit all problems around the critical refugee and immigration agenda.
- Nationalism: Nationalism and new conservatism have grown stronger, and more people follow the lead of other countries, this time shouting “Germany First”. The German People have elected a Bundestag with 60% members from conservative/liberal parties. The traditional left has been badly beaten. The new Government does not represent this, neither in its composition nor in its policies. It has made losers to victors. This is a dangerous game. The German people, like many other nations, are asking and have voted for stronger national identity, less immigration, more sovereignty, new social balance, guidance, and leadership. In case that the Government cannot or does not want to deliver on these demands, a conservative revolution will be on its way, shaking up the German party system faster than many will consider possible today.
- The youth and energy of Macron in combination with the cheques appeal and political cleverness of Merkel will lead to a powerful revival of the Axis Berlin-Paris. In an EU without the UK, this Duo will wield the power and seek selective alliances on a case-by-case basis. Romance.
- Brexit will become even more ugly, as Paris and Berlin will obstruct any easy farewell or special treatment of the Brits. A warm welcome party for UK bankers is prepared in Frankfurt and Paris, there will be no way London will keep unlimited, open access for its services to the EU markets. Illusion.
- The EU will be braced for more integration and new centralization, and if smaller or Eastern countries will not jump on the train, the famous two-speed EU (which already does exist) will happen. Good news: cash loaded Germany will be ready with its new Government to shoulder the additional cost, investments, and guarantees for the EU. Noise.
- The dynamics for easing on Russia sanctions will receive a new drive. Trump is keeping them up against his will, but forced by Congress, France is against them, German Social Democrats will convince Merkel to move, and then there is the resurrection of the Italian Cavaliere which could happen in March; he is known to be strongly against the sanctions. The UK as currently the strongest opponent of Russia will be sidelined and marginalized after leaving the EU. The economy, stupid!
- Trump will have to acknowledge that he will have a strong opponent in the EU (France/Germany/Commission) in case that he will impose any trade measures against Europe. The growing mistrust between the US and the EU will also lead to stronger borderlines in the military and intelligence spheres, the more as the UK is falling away as a bridging factor. From Iran to North Korea, Syria, Palestinians and China, there are now fundamental differences in political strategies and objectives. The transatlantic axis is and will be more weakened, the US will lose influence. Not good!
- If it plays its game well, China has the potential to develop into a real partner for the EU. All countries are keen to service this giant export market while being hungry for Chinese investments at home (except for high tech). On a global stage, Chinese interests are in many economic areas and even in political areas similar to EU interests. Good Game.
- Turkey might be the big loser. It has alienated France, Germany and the Netherlands with direct involvement in elections, politicizing the local communities and in prosecuting EU journalists. There is no chance that any Government in Europe would take a battle for getting closer to Turkey at this time, and it would be suicidal given the current nationalist tendencies in Europe. Moreover, Turkey’s former strong supporter US is angered with its military role in Syria/Iraq and has anyway lost its political clout in Europe. Overplayed.
Or in a nutshell: Germany will continue to be a stabilizing factor, for now. The Government is not what the population would prefer today, but it could prove stronger or more popular than expected. European integration will benefit. US and UK relations will be challenging.