After Angela

The most popular politician in Germany

Three years after she announced that she would not stand again for re-election the moment of truth has finally come for Angela Merkel who will stand down as Chancellor once a government is formed following Sunday’s election (note: past experience suggests it could take a while before this is finally achieved). It is difficult to predict the election outcome: The SPD, which has been languishing in the polls for years, has enjoyed a slight lead over the CDU/CSU in recent weeks but with no party currently polling more than 25% (chart below) many different combinations of government are still possible.

The collapse in support for the CDU/CSU to its lowest recorded level on data back to 1994 is remarkable: Just six weeks ago they enjoyed a six point lead over the SPD. This is at least partly due to the fact that Merkel’s prospective successor, Armin Laschet, is unpopular. Pollsters reckon that around one-third of voters who backed the CDU in the 2017 election did so because of Merkel. Her absence from the ballot paper could cost the party dearly. Whilst Merkel enjoyed a high reputation abroad, her reputation at home looks very solid too. Indeed the latest domestic poll gives her an approval rating of 80% versus only 17% who do not think she is doing a good job. She is also judged to be far and away the most competent of all Germany’s leading political figures, scoring +2.4 on a scale of -5 to +5, compared to Laschet’s dismal showing of -0.4 and some way ahead of the SPD’s candidate for Chancellor, Olaf Scholz, at +1.6.

To some extent this is a reflection of the incumbency effect – Merkel has, after all, occupied the Chancellor’s office since 2005. She took up the post in what are now fondly described as the good old days: before the financial crash; before the euro zone debt crisis; pre-Trump and pre-Brexit. Merkel has subsequently dealt with all of these international crises in a calm, pragmatic fashion, steering Germany through the storms. For that alone, she will be missed at home. But she will also be a big loss on the international stage where leaders with a reassuring presence have been in short supply of late (think Trump or Johnson).

But it has not all been plain sailing. Germany’s role as Europe’s political and economic leader has been reinforced during Merkel’s term, largely by default as traditional international players such as the UK and France became more inward looking. However, she has appeared reluctant to embrace the role. This is in keeping with her natural caution. Merkel has never been one for the grandiose vision and as an apparently keen student of history, she is well aware of the backlash that would emerge in certain quarters if Germany were to start throwing its weight around on the international stage.

... though not necessarily the most economically astute

Her biggest policy error was the handling of the Greek debt crisis. The German government’s insistence that Greece live up to its obligations under EU law may have been in keeping with the letter of the law but was not in keeping with its spirit. Insistence on a punishing austerity programme condemned Greece to an economic depression from which it has yet to recover. For someone with an appreciation of history, this was an uncharacteristic error. As the German economic historian Albrecht Ritschl has pointed out, the cancellation of Germany’s post WW2 debt laid the foundation for the Federal Republic’s modern economy giving rise to the charge of hypocrisy. More seriously, the Greek episode raised many question marks about the future of the euro zone, few of which have been satisfactorily answered. Merkel’s tactics during the debt crisis may yet prove to be very short sighted.

Indeed, Merkel has never shown any great aptitude for economic issues. She came to office in 2005 on the back of the reforms initiated by her predecessor Gerhard Schröder who initiated a programme to boost renewable energy and introduced the painful Hartz IV labour market reforms that did so much to boost German competitiveness. In many ways Merkel reaped the reward of these policies without having to do much herself and she has been far less willing to engage in reform, preferring to maintain the status quo. On energy policy, Merkel’s government did pass legislation in 2010 in support of the Energiewende to continue the process of transforming Germany into a low carbon economy. However, in the wake of the Fukushima nuclear disaster in Japan, Merkel promised to shut Germany's fleet of nuclear reactors by 2022 which resulted in a slower phasing out of coal and fossil gas generation than originally planned. Consequently, the pace of reduction in German CO₂ emissions has slowed over the past decade compared to the previous decade.

Domestic fiscal policy has largely acted with restraint. Germany’s “schwarze Null” budget policy, which aims for balance or a small fiscal surplus, coupled with the debt brake effectively acted as a restrictive financial straitjacket at a time when the economy has tended towards deflation and when infrastructural investment needs have mounted. During a period when Germany has run a significant current account surplus, the government has come under pressure to run a more expansionary fiscal policy but Merkel’s administration has consistently rejected demands to do so. That said, she has proven pragmatic in providing fiscal support when the economy most needed it, particularly in the wake of the 2008 crash and again during the corona pandemic.

Measuring the balance

Although Merkel has not had to be a reforming Chancellor, Germans have little cause for complaint. Indeed, she should be given credit for not derailing the reforms put in place by previous governments. Perhaps one reason for Merkel’s popularity is that she has managed to maintain the status quo by insulating voters from the changes going on around them. For example, Brexit could never happen in today’s Germany whilst Merkel (perhaps reluctantly) made the call to uphold western values at a time when Donald Trump proved unable to do so. The decision in 2015 to open up Germany’s borders to refugees should also be viewed as a great humanitarian gesture. But as The Economist (slightly harshly) put it, “admiration for her steady leadership should be mixed with frustration at the complacency she has bred.”

After 16 years during which Merkel has kept the plates spinning, it will now be up to someone else to tackle the many problems which Germany – in common with all western economies – faces. Whoever the new Chancellor is will not have the personal authority or Merkel’s depth of experience in dealing with crises. They will also have to come to terms with the changed nature of the EU as neighbours such as Poland and Hungary drift away from the EU centre. The new Chancellor will be required to deal with the many issues which are likely to arise in the wake of the pandemic, particularly with regard to the euro zone which has morphed closer to a fiscal union in the last 18 months.

Merkel's successor will do well to be credited with a verb describing their mode of government – to merkeln. It may originally have been coined as a derogatory term to describe one who leads without taking decisions, but there are sometimes worse ways of doing government, as Boris Johnson and Donald Trump have demonstrated.

Preparing for a post-Merkel Europe

We all know that nothing lasts forever and that economic and political change is inevitable. Nonetheless, Angela Merkel’s decision on Monday not to stand again as the chair of the CDU party in December, with a view to bowing out before the 2021 election, was one of those moments when you could hear the tectonic plates shifting. Following a second consecutive poor showing for the CDU/CSU in state elections, this time in the state of Hessen, Merkel took the pragmatic view that she is part of the problem and no longer part of the solution. It takes a special kind of politician to know when to leave the stage rather than being forced out by the rest of the cast, and for that she is to be applauded.

It is also a reminder of just how much the European – and indeed global – political axis has shifted. Merkel is the embodiment of European centrism who has tried hard to keep the EU on track despite the headwinds it has faced over the past decade. Remember how she was cast as the standard bearer of responsible western values following the election of Donald Trump? Yet even she fell foul of the fault line running through western politics – immigration. It took a couple of years to make its presence felt in German politics, with the first signs evident in last year’s general election, but it has been running like a sore in France, the Netherlands and the UK for far longer.

Her anticipated departure raises a number of questions about the future direction of the EU. There is little doubt that it requires a shove in a different direction. Until now, Merkel-style German politics has supported the caravan of countries moving together at roughly the same pace. But there is increasingly a sense that this may not be what the EU needs. There is no doubt that in order for the single currency project to work requires a greater degree of integration. Some form of fiscal burden sharing would appear to be a prerequisite but it is hard to see any German politician agreeing to go down that route. Perhaps the old idea of a Europe with flexible geometry will be given a renewed hearing. This is an attempt to allow various EU countries to move towards their goal at a different pace and perhaps even with different goals in mind. It would certainly be a form of the EU that would be easier to sell to the UK which is struggling to come to terms with its EU-based schism (though too late I fear).

Whilst Merkel’s reputation amongst her opposite numbers at international forums remains high, she is less well-loved in southern Europe. German insistence that Greece deflate its economy has won Merkel few friends amongst the Greek people. It may thus be time to look again at some of the rules underpinning the single currency project. As the current spat between the European Commission and Italy has shown, a strict rules-based approach to domestic fiscal policy can lead to conflict. Despite suggestions in Germany to the contrary, Italy has actually run a pretty tight fiscal stance over the last decade, with cumulated primary surpluses on a par with Germany despite much weaker GDP growth (chart).  Moreover, as is common with most monetary unions, the euro zone struggles with the problems posed by differential external balances. With Germany running a current account surplus around 8% of GDP, this puts upward pressure on the euro and imposes significant strains on those countries that run a current deficit.

Of course, the structure of the euro zone is not specifically attributable to Merkel since it clearly pre-dates her. But Merkel assumed office in good times when the fault lines of the monetary union were nowhere near as evident as they are now, and since the single currency was working for Germany she had little incentive to push for change. However, if the single currency is to work efficiently and endure, the next few years might provide the opportunity to think about where we want to be ten years hence.

Unfortunately, I cannot see any of this happening. Emmanuel Macron has already set out his vision for Europe only to find that when it came to the crunch he got less support from Germany than he would have liked. One of the biggest seismic political shifts in recent years is the extent to which politics has become local rather than global. This probably should not be a surprise – after all, politicians are elected by their own tribe and have to do what is right for them. This makes it even more ironic that in Angela Merkel, Germany has a leader who is respected by her international peers but has been brought low by domestic issues.

When boring is good

The weekend’s big TV debate between the two main candidates in the German election highlighted both the good and bad sides of German politics. It was a pretty tame affair. Even the German press called it the duel that never was, with both Angela Merkel and the challenger Martin Schulz trading pleasantries rather than political blows. In fairness, neither Merkel nor Schulz are particularly charismatic and the format was not conducive to a lively debate. For one thing there were four interviewers from rival channels, all keen to get their questions across. Moreover the interviewers were perhaps rather more respectful towards the candidates than was warranted by an occasion as important as this. The absence of a studio audience was another buzz-killer and as a result there was no interaction with the general public, which is guaranteed to keep politicians on their toes. That said, German voters like their politicians serious and sober (ironically Schulz is a reformed alcoholic) and do not expect to see their representatives treat the political stage as another branch of showbusiness, as happens elsewhere.

Merkel was deemed to have won on points with Schulz unable to land any decisive blows, and as a result she looks a shoo-in to be re-elected as Chancellor on 24 September. As might be expected, the debate was focused on those issues important to German voters so no surprise that Brexit never got a mention. Immigration topped the bill with a large slice of the available time devoted to this hot topic. But according to Thorsten Benner, Director of the Global Public Policy Institute, immigration is not the biggest problem facing Germany (see box below). Whilst acknowledging his superior knowledge of the German political scene, I am not sure I would totally agree. It is not the biggest economic issue but it remains a huge political problem. After all it has helped fuel the surge in support for AfD, and although they may struggle to pass the 5% threshold required for Bundestag representation, the fact the party has any support at all worries mainstream politicians.

Like most political debates of recent years, the economy did not figure highly. Why should it? After all, Germany is growing relatively rapidly, inflation and unemployment are low and it is an export powerhouse producing some of the highest quality manufactured goods in the world. In short, everything looks to be running smoothly. But as Benner pointed out, the car industry also enjoyed a good run, but it has recently been undone by the problems of dieselgate.

Criticism has come from many other quarters too: The newspaper Die Welt has been particularly critical of the Merkel government of late and following the debate, it pointed out that although Germany is one of the most interesting countries in Europe with the world looking to Berlin, its domestic politics is curiously austere and provincial. In an article last weekend, the newspaper highlighted that Germany has under-invested in infrastructure and education. There is some truth in this: After all, the huge current account surplus represents an excess of domestic saving over investment. But as Wolfgang Schäuble has suggested, it makes sense for an ageing society to save for a rainy day. The problem is that Germany has been running a big surplus for the past 10 years with no sign of a reduction. The fact that what are increasingly seen across Europe as excessively large surpluses are rarely spoken about at home is a sign that the savings investment problem is unlikely to be addressed any time soon.

For all that the debate was a bit dull and skirted around many of the issues which economists might wish to have seen tackled, it was also devoid of the bombast that accompanied the US election and the emotionally-charged atmosphere of the Brexit referendum. For that we should be thankful, since at least one significant western power offers political stability. From an international perspective, four more years of Merkel at the helm would not be the worst outcome in these turbulent times. Those of us dealing with dysfunctional governments in the UK, let alone the US, look to German political stability with a degree of envy.