Germany’s New Coalition Government

View Agenda

Panel 1: Setting the Agenda: Challenges, Choices, Expectations

The conventional wisdom had been that the “Jamaica” coalition (conservative CDU/CSU, pro-business FDP, and the Greens) would form the basis of a new German government. Although there had been no illusions that establishing a coalition among such disparate parties would be straightforward, every rational decision-maker saw the coalition as the logical outcome of negotiations. It was, for many, only a matter of which concessions would be made, and by whom. It therefore came as a surprise to a great majority of people when coalition talks abruptly broke down on Sunday, November 19.

Was it a predictable collapse?

• No single point of disagreement stood out as the major deal-breaker; rather, the parties failed to find compromise on a number of domestic issues (e.g., solidarity surcharge tax, competence of state education, etc.).
• For some, the talks were doomed even before they began. The FDP was a party that ran on a platform of change, while the CDU represented the “business as usual” party. Moreover, the changes that the FDP wanted differed significantly from the ones that the Greens were hoping for.
• Others were of the opinion that there were enough common denominators for the Jamaica coalition to have gone ahead. The disappointment stems from a feeling of having missed an opportunity for Germany to set an example for Europe and to demonstrate that parties of very dissimilar beliefs are able to come together.

To what extent is the FDP responsible for the collapse?

• Many held a fair degree of confidence that the talks could fail only by accident. Yet, it was a very calculated move by Christian Lindner and the FDP that resulted in its deterioration. Some argue deliberately pulling out of coalition talks was a decision born of political narcissism; it was made with the best interest of the party—not the country—in mind.
• Lindner’s decision was not an act of political self-confidence, but one that demonstrated the party’s fear of being castrated by its coalition partners.

Where does this leave Germany now?

• There are 50 percent odds of a grand coalition, 25 percent minority government, and 25 percent snap elections. Of these three outcomes, the panelists agreed that snap elections would be the least desirable; in addition to fears of possible gains for right-wing populists, it is unclear whether a new election would in fact produce different results.
• Contrary to what some headlines have suggested, Germany remains politically stable; federal institutions still function as they should. People should not be histrionic about the dissolution of coalition talks, as it has only been two months since the election.
• Germany must strengthen the liberal democratic center. The SPD was described as schizophrenic. Although its leaders refused to form a grand coalition, practically speaking, they never truly departed from their grand coalition responsibilities. Going forward, the Social Democrats will demand more concessions from the CDU.
• There is no feasible alternative to the grand coalition, as an interim minority government will not last long. Given the unpredictability of the current international environment, Europe needs leadership from a strong Germany governed by a majority.

What can the transatlantic partners do?

• In many respects, the foundation of transatlantic security relations remains robust. That is, the NATO alliance is still standing; in Afghanistan, Trump’s policy closely resembles one that Hillary Clinton would have implemented had she been in office; Secretary of State Rex Tillerson—at least in rhetoric—has espoused an “iron-clad” commitment to Europe.
• Nevertheless, the fate of many issues remains open-ended (e.g., the Iran nuclear deal, the Paris Climate Accords). Even questions pertaining to shared core values are being raised (e.g., Trump’s disinterest in human rights concerns).
• Four key challenges for Germany and the U.S.:
  • Formulate a common Russia strategy.
  • Develop a united approach for dealing with Turkey.
  • Deal with the reality of a post-manufacturing economy (TTIP).
  • Determine how the defense budget will be spent.
• There is some doubt on the ability of the countries to achieve these goals. Given very dissimilar historical relations of Germany and the U.S. on Russia, arriving at a common approach to Russia will be very difficult. Regarding Turkey, the important decisions have already been made by the allies; it is now Turkey’s move. Finally, neither the U.S. or Merkel is likely to pull TTIP out of the “deep freezer.”
• Despite the tall orders for Merkel, she will be able to forge a workable relationship with Trump, just as she has done with other difficult leaders. However, there is a danger with the mentality of simply waiting for Merkel to fix the situation—no politician governs forever. Although Merkel’s ability to make serious impacts may be easily overstated, it is not hyperbolic to claim that she is the most influential leader in Europe today.

On international security

• In recent years, Germany has developed tremendously in the area of defense—for instance, Germans have the second largest presence in Afghanistan. Still, Germany should be bolder on conflicts in Ukraine and in the Baltic countries.
• The Western Baltics has not, in fact, been neglected by Germany. Merkel has kept the door to Europe open and has strengthened Montenegro and Macedonia. However, there is still a security gap in Bosnia and Russia exerts considerable influence in the region through the Orthodox Church and the allure of its energy supplies.
• In Asia, the North Korean and Iranian proliferation issues may very well involve the Europeans.
• The Russian and Chinese partnership is getting stronger in the UN; they present greater unity on more issues than the West. In terms of human rights and sovereignty, Europe and the U.S. are on the defensive.
• In the East, the critical question is: “Are we able to come to a solid, common position to move NATO forward, rather than to have it falter?”
• The decision by the caretaker government to extend several military missions (for example, in South Sudan, Mali, Afghanistan) is evidence that policies can still move forward in the absence of a coalition.
• The Nord Stream 2 issue is much more than a commercial project and holds severe political implications. It threatens the project for an independent European energy program.

Panel 2: German Economic Leadership and the Future of the Eurozone

Reforming the Eurozone

• One lesson that can be drawn from Brexit is the importance of political communication. Furthermore, growth is based not only in institutions, but also in ideas. Given that Germany benefits greatly from the Eurozone, how do we convince Germans and Europeans that the euro is in their best interest? How do we challenge the idea of the EU as a “transfer union”?
• All Eurozone countries benefit from having a common currency (e.g., Italy gets lower interest rates than it otherwise would). Nevertheless, firm guarantees are necessary to make the structural reform programs successful. The formula for an effective system must employ greater discipline to strike a balance between risk sharing and mitigation.
• Would the coalition have made a difference for the Eurozone? Most certainly, how the Bundestag looks will drive policies for all countries on the euro. Did Eurozone issues contribute to the breakdown of coalition discussions? Not really—the most contentious problems revolved around internal matters.
• There are many structural problems that have yet to be balanced in the Eurozone: per capita growth is still too slow, there are still widely varying unemployment rates across Europe (3 percent in Germany compared to 9 percent across Europe), productivity growth in Germany is much higher than the Eurozone average, there needs to be a single resolution mechanism to reform the banking system.
• The European Stability Mechanism (ESM) must develop a fund to deal with external shocks, one where the U.S. would contribute to alleviate dips during crises.

The future of the euro

• The future of the Eurozone concerns not only the European economy, but also deeply impacts U.S. and global prosperity.
• While Germany does not want to be liable for foreign debts, it is willing to assist other countries with guarantees. The situation of debtor countries in the Eurozone (e.g., Greece, Ireland) are improving and current policies in place are moving them in the right direction. Next year, Greece will not need as much financial support to prop up its economy.
• The advent of digitization means governments will play a diminishing role in the economy. For example, blockchain technology is likely to revolutionize the banking sector and make banks obsolete (something the euro is trying to do).
• Macron’s project for a common European financial structure is even less probable now than before. The Bundestag was more flexible on these issues six months ago, but the entrance of right-wing populists in the Bundestag has made Germany less Europe-friendly.
• The Eurozone is ultimately a treaty between nations; accordingly, its success depends on the confidence to fulfill laws of said agreement (through a stability pact). Since the financial crisis, the appropriate instruments have been created and the situation is now much better now than it had been prior to the crisis.
• Currently, strong growth in the Eurozone is a reason for optimism.
• Is there any validity to American criticism of Germany’s trade practices? Trump’s trade imbalance accusations are made through a myopic bilateral lens when macroeconomic considerations should be global. Nevertheless, Germany needs more investment to bolster its domestic infrastructure and a stronger push to increase wages.