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The Blind Spot in the German Election: The Eurozone

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Article
Carnegie Europe

The Blind Spot in the German Election: The Eurozone

Will the next German government finally assume the role of Europe’s political leader? Substantial change in Germany’s approach is unlikely—unless the euro crisis gets even worse.

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By Daniela Schwarzer
Published on Sep 16, 2013

Europe seems to be holding its breath, waiting for the German federal election. Germany is reproached for not doing enough to lift Europe out of the euro crisis. Critics of Berlin’s approach to the eurozone’s sovereign debt and banking crises hope for a policy change after the vote on September 22 and stronger German leadership. Europeans wonder whether a newly elected government will finally assume the role of political leader of Europe. But substantial change is unlikely—unless the crisis becomes even worse.

The critics’ views stand in stark contrast to opinions in Berlin. German policymakers point to a number of effective German-led initiatives since 2010, such as strengthening fiscal rules, tackling problems of competitiveness, and forging the compromises that made the creation of the eurozone’s rescue fund, the European Stability Mechanism, possible. Some also see it as a success of German leadership that exposure to risk and cross-border liabilities remain limited in the eurozone despite the funds poured into ailing economies.

These views are widely shared by the Christian Democratic Union/Christian Social Union (CDU/CSU) and the Social Democratic Party (SPD), the two largest groups in parliament. That is one of the reasons little controversy over eurozone issues has made it into German election campaigns.

For current German policymakers, there is no strategic void. Rather, Germany’s strategy is starting to bear fruit and should be pursued further. So with the current chancellor, Angela Merkel, likely to lead a coalition into power for a third term, Germany’s future economic approach will probably look familiar. The continuity will be particularly striking if the current coalition of the conservative CDU/CSU and the liberal Free Democratic Party (FDP) continues.

Some small shifts in course are yet possible, in particular if the coalition partner changes. The SPD has supported Merkel’s crisis and governance decisions and has only occasionally made the case for additional action. It shares the CDU/CSU’s opposition to any solution to the banking crisis that is financed by domestic taxpayers without a German veto. The SPD is also likely to back the CDU in refusing to rapidly introduce eurobonds. Two years ago, the SPD argued for a pooling of sovereign debt, but the party’s enthusiasm has cooled because the European Central Bank’s outright monetary transactions (OMT) plan to shore up economies by purchasing EU government bonds has reduced the perceived urgency to act. If the SPD pushes for them at all, it will likely only do so as part of a more encompassing fiscal union based on control pillars the outgoing coalition has strengthened.

If a so-called grand coalition of CDU/CSU and SPD were formed, the Social Democrats could, however, take some of the disciplinarian edge off the current conservative/liberal stance on Europe. Promoting growth in Europe could become more of a priority than primarily imposing austerity measures in crisis countries.

Macroeconomic considerations and the need to rebalance the euro area are almost absent from the SPD’s campaign and program, which with regard to the crisis focuses on financial market regulation. But the party could push for domestic policy choices that might fuel consumption in Germany, which is a key component of rebalancing the eurozone. The SPD is also more supportive than current coalition members of increasing the financing of a European growth strategy, and it seeks to establish a European investment and reconstruction fund.

Germany would likely take a more active approach to the European economy if the Green Party made it into the ruling coalition. The Greens believe that more will have to be done to tackle the persistent systemic risks in the eurozone’s financial sector and public finances, including introducing eurobonds as part of a debt redemption fund in the nearer future and true eurobonds over the long term.

On the other end of the spectrum, while the public has not broadly turned Euroskeptic and support for the EU and the euro is in fact recovering among German citizens, a fatigue has built up over three years of an approach to crisis management that many believe lacks democratic legitimacy. The one force that could give that tired portion of voters what they want is the Alternative for Germany (AfD), a new party led mostly by academics and lawyers who want to slash the euro into national currencies or smaller currency unions, stop financial aid, and dismantle the European Stability Mechanism. Yet, it is unlikely that the AfD will gain more than a 5 percent vote share and make it into parliament. Since its public launch in early 2013, the party has only scored around 3 to 4 percent in opinion polls.

Of course, all of these dynamics could soon change. While most eyes are on the September 22 vote, another date could have a larger impact on the economic course of events. Likely in October, the German Constitutional Court will issue its ruling on the OMT bond-buying program. If the court rules that the program is incompatible with German basic law (a scenario seen as relatively unlikely) or that it should be limited in scope and time (the more likely scenario), the immense power of the bond-purchasing promise that managed to stop the self-fulfilling crisis at the end of 2012 could be destroyed.

If the euro crisis escalated further, for this or any other reason, governments would have to step in to keep the euro area together, and Germany would have to take the lead. Any response would entail more risk sharing and financial solidarity than has been acceptable so far.

The German government that emerges after the election, almost irrespective of its composition, would very likely prefer more integration over the dissolution of the euro. It would likely push for a change to the Lisbon Treaty or a euro area treaty to give a deepened eurozone a sound legal base. That would require an almost-unparalleled degree of German leadership, given the political conflict inherent in the endeavor and the risk of alienating strategically important non-euro members such as the UK or Poland.

None of the serious contenders for seats in parliament is preparing the German public for these challenges. No party—except for the AfD—has seriously sought a popular mandate for its European policy stance. The next ruling coalition will have to spend considerable time and energy convincing German citizens about the need to further strengthen the euro, which may be particularly difficult if new rescue packages push onto the political agenda.

Daniela Schwarzer heads the research division on EU integration at the Stiftung Wissenschaft und Politik (German Institute for International and Security Affairs).

About the Author

Daniela Schwarzer

Daniela Schwarzer
EuropeWestern EuropeGermanyEUEconomy

Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.

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