Why the German elections are unlikely to fundamentally alter eurozone policy

europebynight3Open Europe has published an in-depth analysis of the German federal elections, to be held on 22 September, as the second part of its three part series covering German sentiment on Europe. Open Europe predicts possible coalition outcomes for the new government, and provide a detailed investigation of German party positions on key aspects of eurozone policy, and outline where we expect movements after the elections.

Open Europe Policy Analyst Nina Schick said,  “There’s a basic trajectory to Germany’s eurozone policy which is unlikely to change after 22 September, irrespective of who’s in power. Though a Coalition involving the SPD may in temperament be more sympathetic to struggling eurozone countries, in terms of actual policy, Germany’s basic insistence on austerity is likely to remain unchanged.”

Key points:

  • This remains a tight race. We assign a 45% probability to a continuation of the current centre-right coalition (CDU/CSU-FDP); a 40% probability to a grand coalition (CDU-SPD) – though other options are also still on the table, including a centre-left coalition (SPD-Greens) with the passive support of the far left, Die Linke.
  • We assign a 5 – 10% probability of the anti-euro party, AfD, making it into the Bundestag, but given the possibility of opinion polls underestimating the party’s support this is incredibly difficult to call.
  • Of the nine proposals currently floating about to solving the eurozone crisis, we expect clear movement in only one or two areas, including the most important but most unclear one: the proposal for a single eurozone resolution authority for banks. Germany faces the fundamental question of whether to negotiate and work within the framework presented by the European Commission, or move outside EU structures and create an ad-hoc organisation. Whichever the new government chooses could set the tone for the future of the eurozone.
  • Even under a grand coalition, Germany is unlikely to significantly depart from its current emphasis on austerity – any change is at most going to be superficial with Germany pushing the same policy in a slightly different package. Ultimately, such an approach is driven by Germany’s own experience with deep structural reform as well as the broad support it enjoys from the general public.
  • German politicians and the general public are both keen on stronger central eurozone control over taxation and spending as a prerequisite for any further financial aid to struggling members of the single currency. Such beefed-up supervision and enforcement could well require EU treaty change in some form. A Merkel-led government may push for a formalised “competitiveness pact” after the elections, whereby struggling eurozone countries commit to reforms in return for aid.
  • The position on further eurozone aid to Greece and/or Portugal is unlikely to shift much. All parties broadly accept the need for a third Greek bailout, although all the main parties are keen to delay the decision until after the elections. The CDU/CSU and SDP both oppose a further debt write-down for Greece. With 75% of Greek debt now owned by taxpayer-backed institutions, a write down would likely cause direct losses for German taxpayers, in turn potentially causing a massive popular backlash and significant problems at the German Constitutional Court. In any case, some form of assistance for Greece and Portugal looks likely, no matter the government in office.
  • Movement on debt pooling could happen under a centre-left coalition (unlikely) or a grand coalition with a strong SPD presence – with a debt redemption fund, involving temporary debt pooling, being the only workable option. Even so, it will  be a huge task to sell it to German voters, 64% of whom oppose debt pooling, while it would have to jump over many constitutional hurdles. We still hold it as an outside possibility.
    Summary of parties’ positions on EU policies and the likelihood of changes after the elections. Click here for enlarged view

Open Europe is an independent think-tank calling for reform of the European Union.

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