The CDU, CSU and Mrs. Merkel are the losers in recent “horse-trading” in Berlin. The winners are the SPD and those wanting further rounds of European integration. We analyze the emerging Grand Coalition (now discussed in German-speaking circles under the acronym GROKO) and its likely consequences. European “integrationists“ have reasons to rejoice. Those who believe in the free operation of markets and worry about public sector financial excess should be very nervous. Germany’s period of economic outperformance is drawing to a close.
In negotiating her fourth coalition government, Mrs. Merkel has shown herself prepared to pay almost any price to avoid fresh elections.
The SPD and its agenda have been boosted, something that should make Bundespräsident Steinmeier, “the father of GROKO”, rather happy.
Probably the CDU and CSU have never had to make as many concessions in their history as they have done in early 2018. The SPD’s Sigmar Gabriel is likely to be Germany’s next Foreign Minister and Vice-Chancellor, giving the SPD the most important government position after the Chancellorship. It should also have the Finance Ministry, and thus the third most important job in the new government. Metaphorically, the Chancellor finds herself sandwiched. The SPD Finance and Foreign Ministers will report to her while she (in theory) is answerable to the Head of State, the SPD’s Mr. Steinmeier. Although the Bundespräsident has primarily a representative function, that would be to ignore the strong links that Mr. Steinmeier has within his party as well as his grasp of “Realpolitik“ and the implications of the current situation for the Chancellor. The SPD has not done badly in recent negotiations, considering its share of the vote in last September’s Federal elections fell by 5.2%, compared with the 2013 result, to just 20.5% . For reference, last year’s results for the other parties were as follows – CDU/CSU (32.9%), AfD (12.6%), FDP (10.7%), Linke (9.2%), Grüne (8.9%).
Despite being the real loser in September’s elections the SPD has managed to put its stamp on the new coalition. And Mrs. Merkel, the CDU and CSU will have to pay a high price, with large chunks of their program likely to be jettisoned for that of the SPD. The center-right parties and their core voters will not welcome this push to the left. By contrast, the SPD, and in particular Mr. Steinmeier as Queen-maker, have garnered prestige and power.
Messrs. Steinmeier and Gabriel are eloquent and both know how to put on a show. Mrs. Merkel’s strengths rather lie in negotiating behind closed doors and she is no rhetorician. Thus she could be vulnerable in a leadership struggle framed around the issues of agility, leadership and assertiveness. No wonder that the indications are increasingly of a loss of support for Mrs. Merkel within the CDU and CSU.
The upcoming 2018 Bavarian elections could well show the big winner and the big loser in the new political constellation. Many expect the CSU to lose a lot of votes to the AfD.
The weaker positions of the CDU, CSU and Mrs. Merkel also imply a power swing within Europe towards France and to all those seeking further rounds of integration within the EU. In effect, this could mean the EU becoming more of an “institutionalized transfer union“.
It seems likely that some of the few remaining market-based oases in an increasingly state-controlled European economy will be regulated out of existence. Thus Germany and the EU are moving in the opposite direction to the US where the Trump Administration is trying reduce the power of the state and of its regulators.
Investors should brace themselves for an increase in government spending. Social spending budgets, cohesion funds, infrastructure and defense spending are all likely to increase as is the number of government employees. Resistance to Keynesian, debt-financed stimulus programs will melt away. There is no longer room for a Finance Minister with orthodox liberal ideas as to the usefulness of markets such as Mr. Schäuble.
Attempts to restrain excessive public sector spending, creeping regulation and the extension of public debt will have to be put to one side for the time being. We have to admit that France has managed some tentative steps in the direction of reform, but these look set to be counteracted by the socializing principles which would underpin GROKO. While one might say that GROKO will accelerate the convergence process within the Eurozone, such convergence looks like being of the wrong kind – involving a retreat from sound economic principles and an expansion of the state at the expense of a functioning market mechanism. A negative spin would suggest that competition will be reduced by a determination to coordinate policies within the context of reduced living standards. But some optimists will focus on the assessment that integration within the EU is likely to up steam.
Turning to German politics, we see the smaller parties as the big winners in future. The FDP, the Greens and the AFD are set to expand substantially their vote shares. With the CDU under Mrs. Merkel moving ever more to the left, many of the CDU’s traditional voters are likely to feel more at home with the FDP, and even the AfD.
What is remarkable about the left’s increased power as a result of GROKO negotiations is that, prior to the Federal elections, the dominant concern was that Germany might move too far to the right.
In recent years as the Financial Crisis, the various Eurozone crises as well as problematic levels of public indebtedness in many countries have combined to push policy makers into accepting very low European interest rates and a weak euro. And the German economy has benefitted strongly from this combination. But Germany‘s period of economic outperformance looks to be coming to an end. European policies aimed at keeping sickly institutions and industries alive may have positive effects in the short term but in the long term their impact is detrimental, undermining competitiveness and growth. In terms of an economic Ryder cup, the US has now seized the advantage with the Trump Administration’s deregulation initiatives. And recent political developments on this side of the Atlantic suggest a European comeback has become more difficult.
Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44
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In the latest Aquila Focus, Nicolas Peter, Head of Banking & Investments, discusses the continuing rally in US tech stocks and the lack of an interest rate cut in the USA for the time being.
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