The Final Rush: How Will the Election Impact Europe?

Alexander Privitera

AGI Non-Resident Senior Fellow

Alexander Privitera a Geoeconomics Non-Resident Senior Fellow at AGI. He is a columnist at BRINK news and professor at Marconi University. He was previously Senior Policy Advisor at the European Banking Federation and was the head of European affairs at Commerzbank AG. He focuses primarily on Germany’s European policies and their impact on relations between the United States and Europe. Previously, Mr. Privitera was the Washington-based correspondent for the leading German news channel, N24. As a journalist, over the past two decades he has been posted to Berlin, Bonn, Brussels, and Rome. Mr. Privitera was born in Rome, Italy, and holds a degree in Political Science (International Relations and Economics) from La Sapienza University in Rome.

The resounding victory for the Christian Social Union (CSU), the sister party of Chancellor Merkel’s Christian Democratic Union (CDU), in the Bavarian state elections last Sunday marks the opening of the last week of frantic campaigning in what ― according to many observers ― is the most boring German election in decades. Indeed, the campaign may never turn into a Hollywood thriller. But, for many German politicians as well as some parties, this is a make or break week.

The Free Democratic Party (FDP), Angela Merkel’s coalition partner, is teetering on the edge of political irrelevance. The FDP was kicked out of the Bavarian Landestag – the local parliament – last Sunday. Its leaders are now begging conservative supporters to vote tactically in order to push the party over the 5 percent threshold needed to re-enter the Bundestag ― the German lower House ― next Sunday. This is not the first time the FDP has flirted with death. However, even the party faithful have a hard time describing what the FDP currently stands for. It will be a close call.

This time around, the Chancellor Merkel’s CDU is not encouraging voters to vote tactically and split their support amongst different coalition partners, the Christian Democrats and the Liberals. It’s a luxury the party leadership believes it cannot afford. The CDU still expects to beat the Social Democrats and win. However, it is not at all clear how large the margin will be. Since turnout is key and Merkel has lulled supporters into complacency for months, rallying the troops around the Chancellor and getting them to actually vote is so much harder. A low voter turnout could be a problem for the Chancellor.

The Social Democrats are still haunted by the dismal results at the last elections in which they sank to about 23 percent of the vote. They are anxious to move up rather than sideways.

The CSU just confirmed that it is once again a force to be reckoned with, not necessarily a good thing for Merkel, given its often rather populist take on things – think of the euro.

As for the Greens, after recent highs, they now seem to be struggling with the law of gravity. The countdown to a quite serious leadership shakeup has already started.

The fate of the Left Party, the former communists, is not a decisive factor at this point in the make up of the future government. As long as their position on NATO and the euro does not change, the Left will continue to make life for the Social Democrats hard. This means the Left is simply not a potential coalition partner at the federal level in Berlin, not yet at least.

This brings us to what happens after election day on September 22. The odds are that we will either see a continuation of the current Black-Yellow Coalition or a Grand Coalition between CDU and SPD. As things stand, the Grand Coalition is probably the most likely outcome, but it would take some time to emerge. The Social Democrats will likely bargain long and hard.

Does it matter for Europe? Probably not much. On European issues, there already is a Grand Coalition in Berlin. But, could Merkel change her strategy towards her euro area partners ― perhaps even act with greater courage in order to expedite the journey towards closer European integration? I doubt it very much.

She will probably take all necessary steps to overcome sudden funding gaps for program countries such as Greece or find ways to ease the path for Ireland and Portugal back to full access to sovereign bond markets. She will also continue to support the European Central Bank (ECB) should the situation suddenly deteriorate. But she will continue to insist on the right balance between solidarity and accountability. In short, she will continue to press weaker countries do their homework and make sure that Germany does just enough to keep the ball rolling.

It’s her signature step-by-step approach. As long as Merkel thinks it was a successful way of dealing with the crisis, she will stick to it. All indications are that she does. Austerity could be eased somewhat, but don’t expect Keynesian policies to dominate the conversation. Even most euro area member countries accept a certain level of austerity, largely for fear of loosing access to bond markets and their fiscal sovereignty.

How about the completion of the institutional framework, such as establishing a full banking union? This is the true test and where things start to get very tricky. Banking union is not only necessary in order to put the euro zone banking sector on a sound footing, but also a huge step on the path toward closer political and fiscal union. Last but not least, it is a way to restore some symmetry in a process that has extracted significant chunks of national sovereignty from countries undergoing a painful economic adjustment while shielding all creditor countries.

Officially, Germany champions closer integration. Unfortunately ― at least so far ― the negotiations on a banking union seem to suggest otherwise. Whether a Grand Coalition in Berlin would change the dynamic is very much an open question. Many Social Democrats easily mistake banking union for another way of rewarding bankers while saddling taxpayers with yet another bill.

Given the complicated nature of the project, no German politician is even considering the need to explain to constituents why it is necessary to put euro area banks under one roof. In fact, Europe was almost absent from the public debate in Germany for months.

Perhaps if the anti-euro party “Alternative für Deutschland” (AfD) makes it across the finishing line, the established parties could be forced to have a more honest conversation with German citizens about the need to make Europe stronger. However, given the general mood in the country about the euro, things could turn very ugly. Before leading Europe, any German Chancellor ― old or new ― will have to lead the German people. No matter what happens next Sunday, it won’t be easy.

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American-German Institute.