29.09 Weekly Viewpoint : The likely participation of the FDP liberals in the new German government is not good for the Eurozone reform process

However, the action of the new government may be limited by the need to mediate between markedly different positions. …..

The German elections brought more than one surprise. The Christian Democrats (CDU) led by Angela Merkel were confirmed as the country’s leading party, but the 32.9% share of the vote won marks a sharp decline compared to 2013 (41.5%). The SPD Social Democrats led by Martin Schulz incurred a severe defeat, achieving just 20.6% of valid votes. For both the CDU and the SPD, the result was the worst overall since 1949. The fact that the country has been governed for (too) many years by broad coalitions, has made the two major parties too similar to each other in the eyes of the voters, who have stopped viewing them as alternative. For this reason as well, Schulz, the leader of the SPD, said he considers it more appropriate for his party to stay in opposition.

The far-right populists of Alternative für Deutschland attracted 13% of the vote. This is the first in post-war history that a far-right party has gained access to Parliament, although it will not be crucial in any way in the negotiations for the new government. The turnout for the vote a hefty 75.9%, up significantly from 71.5% in 2013, which indicates that the radical right has been able to intercept the votes of previously discouraged electors. The FDP liberals are back in Parliament with a 10.7% share of the vote, after failing to make the cut in 2013.  The Green Party expanded its consensus by one per cent (to 8.9%), and the far-left Die Linke progressed to 9.2% from 8.6% in 2013. 

Forming a government coalition will not be an easy: the process will take at least two months. Based on the outcome of the vote, we believe the likeliest outcome will be a Jamaica coalition, which owes its name to the colours of the symbols of the parties that would form it: CDU (black), FDP (yellow), and the Green Party. Merkel has already governed alongside the FDP in 2009-2013, but the liberals paid a high price in terms of consensus at the end of the legislature. The FDP is in favour of a liberalisation of services, an easing of fiscal pressure, and higher public spending.

On European matters, the FDP, which is likely to get the Ministry of Finance, is even more conservative than the christian-democrats. It is in favour of strengthening the no-bailout clause and of inflicting sanctions in case of failure to respect fiscal rules. The members of the party openly oppose Outright Monetary Transactions, while supporting a market-based solution to new debt crises (Christian Lindner, leader of the FDP, openly supported a restructuring of Greek debt). The FDP is in favour of the risk weighting of the sovereign assets held in bank portfolios, and would be open to renegotiating the Treaties to allow member states and “orderly” exit from the euro area. The party is open to a “multi-speed Europe”, but opposes other reforms Merkel has expressed a favourable view on, such as the establishment of a Eurozone minibudget set forth again by French President Macron this week as part of hits agenda for the European Union. On the other hand, the German Green Party holds entirely opposite views to the liberals’ on many topics: in addition to making the management of a government coalition more difficult, this could impose more balanced positions – or simply lead to a paralysis in government initiative. All considered, the CDU-FDP-Green coalition in the next legislature is unlikely to help in the process of reforming European governance towards a more solidaristic approach.

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Source: BONDWorld