Germany's energy dilemma

Western European politics is in a state of flux, the like of which we have not seen in the post-1945 era. The hapless machinations of what passes for the British government (the collective noun for which is “an embarrassment”) will be the subject of a future post. France, too, is suffering its usual quintennial bout of angst as the commentariat worries about the prospect of the extreme right snatching the keys to the Elysée Palace following last Sunday’s first round of voting in the presidential election. But perhaps one of the most intriguing issues is what is happening in Germany where the Ukrainian war is having a profound economic and political effect which will force it to face up to some hard truths.

The economic challenge

More than most European countries, Germany is highly dependent on imports of Russian energy. This is one of the legacies of Angela Merkel’s energy policy which attempted to phase out coal and nuclear electricity generation in favour of renewables but which required the use of gas as a transition fuel. Germany currently imports 60% of its energy needs with half of its gas and coal requirements and one-third of oil coming from Russia. It thus faces a dilemma. If it stops buying Russian energy the economy will take a considerable hit. If it continues to buy, Germany is merely directing additional funds towards Russia which can help it prosecute its war with Ukraine.

In a fascinating paper by Rudi Bachmann and colleagues[1], who are to be congratulated for getting their analysis out within two weeks of the outbreak of war, a group of nine German economists constructed a simulation of what would happen to the economy in the event that Russian energy supplies were brought to a halt. Their analysis points out that in the short run, a cessation of Russian imports would require significant substitution effects, either in the form of energy requirements or alternative supply sources. Given the importance of Russian gas supplies, it will prove difficult – if not impossible – to cover all of the shortfall. It is reckoned that Germany could cover around 20% of the gas from other sources and another 20%-30% from energy substitution and agreements with other EU countries. Nonetheless, this would likely entail a 50% shortfall in gas demand with consequent big price rises: “switching from comparatively cheap contract prices with Russia to world market spot prices would imply a substantial (currently five-fold) increase of the gas price.”

According to the simulation results, the cost to the economy would be “substantial but manageable. In the short run, a stop of Russian energy imports would lead to a GDP decline in range between 0.5% and 3% (cf. the GDP decline in 2020 during the pandemic was 4.5%).” They go on to point out that in the pessimistic case where it proves very difficult to substitute Russian gas in the short-run “the economic costs would rise to … about 1000 Euros per German citizen over 1 year. This comes potentially on top of a large increase in energy prices for household and industry even without a shortfall of gas deliveries.” The authors recognise that the poorest households would be the hardest hit which would require significant fiscal support in the form of lump-sum payments, increased social assistance, reductions in the electricity tax or raising income tax allowances.

The political response

The political response was dismissive. In a TV interview on 27 March, Chancellor Scholz responded to the analysis contained in the Bachmann et al paper by saying: “They get it wrong! And it’s honestly irresponsible to calculate some mathematical models that then don’t really work. I don’t know anyone in business who doesn’t know for sure that these would be the consequences.” This reminded me of Michael Gove’s comment ahead of the Brexit referendum that “the people of this country have had enough of experts” when economists pointed out that there would be considerable economic downsides to leaving the EU (remind us again, Mike, how did that work out?). We can argue about the magnitude of the hit to the economy but what enraged large parts of the academic community, in Germany and elsewhere, was the nature of the dismissal. The paper was rational, well thought-out and addressed many of the concerns subsequently raised by the critics. It was not rebutted on the same basis. It was simply trashed as cover for the fact that politicians are not prepared to take the big decisions that will have major electoral consequences.

Perhaps even worse is the hypocrisy of the German government’s position. In the TV interview Scholz pointed out that the financial sanctions imposed on Russia mean that “Putin cannot do anything with the money he has in his accounts.” To put it bluntly, Scholz is suggesting that Germany can carry on buying Russian energy but the funds Russia receives in return cannot be accessed. This is a having-cake-and-eating-it argument reminiscent of Boris Johnson’s Brexit nonsense. Like Johnson’s argument, it is not true. As Robin Brooks at the Institute of International Finance has pointed out, “if you sanction some Russian banks … but leave energy exports and thus the current account surplus untouched, foreign asset accumulation shifts from sanctioned to non-sanctioned banks. Russia's export machine re-jiggers, but still works” (see chart below taken from Brooks' Twitter feed).

This is not a moral judgement about whether Germany should continue to buy Russian energy. That is a decision for the government to take on behalf of the electorate. It is, however, a criticism of the German government’s claim to be taking steps to impose sanctions whilst continuing to fund the Russian government. The position of voters is more nuanced. According to a survey conducted for the briq policy monitor, “two-thirds of the German population would be willing to pay higher prices for gas and heating if this were to increase pressure on the Russian government ... And more than half of higher-income households would be willing to spend some of their income to help poorer households cope with higher energy prices.” Whether that view would survive the huge rise in bills that would result from a Russian energy embargo is moot. As Mike Tyson once said of boxing, “everyone has a plan until they get punched in the mouth.”

Wider implications

Although the EU has now imposed a ban on Russian coal purchases, Germany continues to resist efforts to ban Russian gas purchases which undermines EU efforts to impose more effective sanctions. This has not gone unnoticed in Ukraine which this week snubbed a planned visit by German President Steinmeier who previously adopted a conciliatory stance towards Putin. The reaction by the SPD’s parliamentary group, which suggested that Ukraine should not “interfere unduly in our country’s domestic politics” was not exactly a dignified response.

Germany’s position has also attracted criticism from another source with its actions to impose austerity on smaller EMU nations in 2011 contrasting with its current unwillingness to impose similar medicine on itself. As the French economist Thomas Philippon put it: “Eleven years ago, Greece experienced a sovereign debt crisis. The causes were irresponsible fiscal policy and bad luck. Today Germany is experiencing a geopolitical crisis. The causes are irresponsible energy policy and bad luck.” Paul Krugman made a similar point: “while Germany was willing to impose economic and social catastrophe on countries it claimed had been irresponsible in their borrowing, it has been unwilling to impose far smaller costs on itself despite the undeniable irresponsibility of its past energy policies.”

Whilst Germany undoubtedly finds itself in a difficult position, its problems are partly of its own making. The policy establishment essentially allowed Russia to take a stranglehold on its energy policy and is not prepared to take the hard choices which result from that. If that seems an unduly harsh assessment, it is nothing compared to the criticism I have heaped on various British governments. But having watched the German government dish out prescriptions to southern Europe which caused considerable economic hardship, it is difficult avoid the charge of hypocrisy as the (perhaps understandable) Germany-first policy holds back EU efforts to find a common response.

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[1] Bachmann, R., D. Baqaee, C. Bayer, M. Kuhn, A. Löschl, B. Moll, A. Peichl, K. Pittel and M. Schularick (2022) ‘What if? The Economic Effects for Germany of a Stop of Energy Imports from Russia’, ECONtribute Policy Brief No. 028 (available here)

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.

Germany's political and economic stagnation

Whilst the UK political class continues to eat itself over Brexit, other European countries are increasingly having to face up to significant difficulties of their own. Nowhere is this more evident than Germany where Angela Merkel’s CDU took another significant beating in regional elections in Thuringia over the weekend, pushing it into third place behind the ultra-right AfD and the ultra-left Die Linke. This has given rise to speculation the CDU may have to hold its nose and do a deal with Die Linke, whose roots stem from the former East German communist party. Although the CDU’s leadership officially continues to rule out doing a deal with either of the other two parties, it is a sign of the times that such an idea is even being publicly contemplated.

Meanwhile, the CDU’s governing coalition partners, the SPD, are in the throes of a leadership process that could see them quit the government. Party members have long been critical of its partnership with the CDU, since it has cost them widespread popular support for little apparent gain. In a vote held over the weekend, finance minister Olaf Scholz and his running mate Klara Geywitz narrowly topped the ballot of party members with 22.7% of the vote. Scholz will now face a run-off against the team that finished second in the ballot (Norbert Walter-Borjans and Saskia Esken), with the result set to be announced on 29 November. Team Scholz is committed to the SPD remaining in government. Their opponents would almost certainly want to pull out of the coalition which would make life difficult for Angela Merkel.

It is almost exactly a year since Merkel announced that she was standing down as chair of the CDU party and the European political centre which she represents now faces even stronger headwinds than it did then. Her anointed successor, Annegret Kramp-Karrenbauer (AKK) has not pulled up any trees and German media reports suggest that she has failed to stamp her authority. She certainly does not look like a Chancellor-in-waiting. To add to the political difficulties, the German economy is struggling in the backwash of the US-China trade dispute, with the Q3 GDP figures due for release in a fortnight’s time widely expected to show a second consecutive quarterly contraction. Although Germany has grown more rapidly than the UK over the period since the EU referendum in 2016, this has not been the case of late. Indeed, in the six quarters since the start of 2018, the UK economy has expanded by 1.8% in real terms versus 0.8% in Germany.

It is questionable whether a stronger economy would have much impact on the politics, since this reflects more deep-seated issues, but it is certainly not helping. As a consequence, there is mounting pressure on Germany to ease its fiscal stance. A report in the Handelsblatt newspaper ahead of the finance ministry’s latest tax revenue estimate suggested that the budget surplus this year could be in the “high-single digits”, with tax revenues expected to be around 4 billion euros higher than in the previous estimate published in May. Furthermore, the collapse in bond yields has resulted in an estimated 5 billion euros reduction in debt servicing costs. These are not big numbers in the grand scheme of things, with the budget surplus only likely to be around 0.25% of GDP, but given where we are in the economic cycle today Germany can afford to run a small deficit and still reduce the debt burden. The condition for doing so depends on the extent to which nominal GDP growth exceeds the average interest rate on federal debt. With the latter clearly in negative territory it is evident that there is a reasonable amount of fiscal headroom.

Although it did open the taps to combat the fallout from the financial crisis of 2008, the Merkel government has never given the impression that it is willing to use fiscal policy as a counter-cyclical policy instrument. It is probably expecting too much to expect a response in the near-term as political paralysis takes hold. But if Germany does not act, it is unlikely that other countries will either – despite the calls from outgoing ECB President Mario Draghi in a valedictory speech to euro zone heads of government today. Draghi is, of course, the man who promised to do “whatever it takes” to save the euro in 2012. We need someone to demonstrate the same degree of fiscal courage today.

But Germany’s economic problems are not all about fiscal policy. It is an economy which relies heavily on the export of high quality manufactured goods and as such has been a beneficiary of the globalisation process of the past 30 years. But globalisation may well have reached its limits, as evidenced by the slowdown in world trade growth and the slowdown in the KoF Globalisation index. Incidentally, this is the sort of fate that could await the UK as it seeks to find new export markets at a time when the rest of the world is more interested in turning inwards.

Finding solutions to lance the boil of populist politics will be harder. This is not just a German problem, of course, but without Germany driving from the political centre the rest of the EU caravan is unlikely to make much progress. As we edge nearer to the end of Angela Merkel’s term of office – she has made it clear that she will be gone within two years – there are big question marks over where the EU goes from here. Does it follow the Macron recipe for greater political and fiscal integration or will the current widening of political differences continue? One thing is for sure: The EU that the UK government hopes to leave is not the one it thought it was leaving in 2016.

EU may see it differently

Although the British government was given a bloody nose following last week’s Salzburg summit, events of the past few weeks act as a reminder that Brexit is one of the few issues on which the EU27 is able to present a united front, since almost all the leaders of the larger nations are facing mounting domestic difficulties. 

Nowhere is this more evident than in Germany where Angela Merkel is facing what looks to be a significant fracturing of the political consensus. In summer 2017, the CDU/CSU coalition was running at 39% in the opinion polls with the SPD polling 25% and the AfD 8%. Latest polls put the CDU/CSU at 28%, the SPD at 17% and the AfD at 16%. In the 20 years that the Emnid weekly poll has been running, the share of the CDU/CSU and SPD, which together represent the main German political factions, has never previously fallen below 50%. That the AfD and SPD are running neck-and-neck in the polls is an indication of how things have changed. The fact that the AfD has maintained its polling status even after the riots in Chemnitz is another illustration of that fact.

The ousting this week of a long-term Merkel ally as head of the conservative bloc's parliamentary group is an indication that her domestic opponents have been emboldened by apparent signs of political weakness. With Merkel already one year through her four-year term, and unlikely to stand as Chancellor at the next election, the beginning of the end of her time on the stage is apparently unfolding before us. 

Not that Emmanuel Macron has much to be satisfied with. According to latest polling data, only 28% of French voters are satisfied with his performance – down from 35% in July and compared with 60% in summer 2017. This puts him on a par with Francois Hollande’s polling ratings after a similar period in office, and way behind Nicolas Sarkozy. Macron’s problems are: (a) he does not enjoy as much support as his landslide election win suggested – many voters simply chose him because he was not the right wing Marine Le Pen; (b) he has been unable to deliver on his promise of a domestic political revolution, and (c) promises to cut taxes remain so far unfulfilled (see this BBC article for a closer look at Macron’s woes).

As I have noted previously (here), Italian politics has been in flux since the spring election as the League and Five Star parties continue to share an uneasy alliance. Current negotiations regarding the 2019 budget have been dragging on for weeks, with the technocratic finance minister Giovanni Tria under pressure to increase the budget deficit to accommodate the expensive election promises of the populist coalition government. There are concerns that a deficit in excess of 3% of GDP would be a problem for the European Commission, provoking a row over fiscal policy that would result in another general election next year. Whether or not this materialises is not the point: It is yet another distraction that Italian voters – and indeed the EU as a whole – can do without.

Factor in the ongoing problems between Brussels and the governments in Budapest and Warsaw, and the news that the Sweden’s  centre-left prime minister has been forced out by the centre-right bloc after an inconclusive election earlier this month, and the scale of the political problems facing EU leaders becomes evident.

Thus, when the British newspapers obsess about Brexit as if it were the only game in town, you can be sure that they have it all wrong. The trials and tribulations faced by Angela Merkel over recent months highlight the extent to which the old order is crumbling. When even the German Chancellor faces mounting domestic problems as a result of the EU migration crisis, it is pretty evident that something is wrong. The likes of Italy and Spain feel that they have been left alone to cope with the waves of migrants arriving on the EU’s doorstep whilst countries such as Austria, which are located on the main land route towards Germany, are concerned that migrants should exit their territory as quickly as possible.

Indeed, immigration is the fault line running through European politics. It was one of the key issues in the Brexit campaign – this was, after all the topic which most exercised UKIP under Nigel Farage – and played an important role in Dutch, French and Italian elections over the past 18 months. There is clearly no easy fix. Aside from any irrational prejudices that people may have, the economic issue is what effect will large migration numbers have on public finances, wages and per capita incomes. The UK evidence does not suggest that there has been any significant adverse impact on the economy. Indeed, much of the empirical work conducted over the last decade suggests that immigration has had no significant negative impact on the job prospects of UK natives. The evidence of its impact on productivity is less clear cut but due to the fact that the skill levels of those entering the UK are generally high – notably those coming from the EU – the empirical studies conclude that a 1 percentage point in the migrant share of the working age population raises productivity by anything between 0.4% and 2%.

But this cuts no ice with electorates which believes this all to be fake news. The fact that populists continue to squeeze the political centre is a concern for those politicians looking for traditional European solutions, involving compromise and rationality, to these 21^st century problems. Too many European politicians are fighting their own battles against populists to care too much about what the UK wants. If British politicians want to engage constructively with the EU27, it might help to recognise that the UK is not unique in any way – apart, that is, from being stupid enough to open a Pandora’s Box, in the form of a referendum, that will not easily be closed.

Assessing the strength of the tremors

Earthquakes are the result of long periods during which two tectonic plates rub against each other but are unable to smoothly slide over each other due to geological irregularities. But the pressure finally builds up sufficiently to force one plate to slide over the irregularity with such force that it releases energy in the form of a quake. They are generally unpredictable in terms of their timing and the impact of their devastation. But the forces triggering them take a long time to build – indeed, one could be forming under your feet right now.

So it is with economic events and today we have seen a couple of minor tremors which could be the prelude to a much bigger event. Let’s start in Germany where talks to try and form a coalition government finally failed yesterday after two months of fruitless negotiations. There are now essentially three options on the table: form a minority government; form a grand coalition with the SPD or call new elections. Chancellor Merkel does not appear keen on a minority government and the SPD apparently are not willing to repeat the experience of the legislative period 2013-17 when they were accused of being the CDU’s lapdog. And the option of new elections is not palatable to anybody, although Merkel sees it as the least worst option. Indeed, the shock triggered by the September result might cause those who voted AfD as a protest to rethink their strategy because it simply leads to more political chaos. There again, they may not.

Having negotiated the Dutch and French elections earlier in the year, the irony would be if Germany were to become the primary source of political instability with Angela Merkel’s credibility dented beyond repair. It is bad news for two reasons. First, for the euro zone. Having helped steer the euro zone through an existential crisis, Merkel is perceived to be critical to attempts to keep the region on track. Indeed, in Emmanuel Macron she has a political partner across the Rhine who has the vision and energy to kick start Franco-German co-operation. But like other European countries which have turned in on themselves in a bid to address domestic dissatisfaction, a large swathe of the German electorate voted for the AfD in protest at Merkel’s policy of opening the gates to thousands of immigrants. Even assuming she remains as Chancellor, Merkel cannot blithely dismiss this constituency, suggesting she may be a bit too preoccupied in future with domestic issues to fully focus on the euro zone.

It may also be bad news for the UK as it seeks to push forward with Brexit negotiations, for precisely the same reasons. A German Chancellor who is understandably more worried about domestic developments will be less focused on a problem which is perceived across the EU27 as a self-inflicted wound. Moreover, there still appear to be those on the UK side who believe that getting Germany onside will be sufficient to help them get what they want. This was always a naïve view – after all there are 26 other governments with a vote. But if Merkel is less willing, or able, to push through a Brexit deal it removes a crucial weapon from the British armoury.

A second tremor today was the announcement that the European Medicines Agency and European Banking Authority are set to leave London for Amsterdam and Paris respectively. This is the Realpolitik of Brexit in action. For a quick overview of why the loss of the EMA is a big deal, this Twitter thread is worth a read. Recall that in April, Brexit Secretary David Davis would not accept that the two agencies had to leave London even though it was clear that the EU had already begun the process of finding a new home. And lest we forget, banks have not yet moved people out in great numbers – but move people they will over the next 15 months, despite the smug proclamations of those who think the world will remain the same as before. Indeed, for anyone who believes that Brexit is broadly leaving the UK unscathed, it should be noted that the economy is growing only at a rate of 1.5% per annum compared to a rate around 2% prior to the referendum – and that is despite an economic pickup in continental Europe.

Neither of the tremors we have experienced today bode well for the future of Europe in general and the UK in particular. Sometimes, of course, preliminary tremors never result in the big earthquake – as residents of San Francisco over the last 100 years can testify. But they should be treated as a warning sign that there could be worse to come. In the UK case, you can bet on it.

Vox populi

If Brexit was an earthquake which echoed throughout Europe then the performance of the AfD in yesterday’s German election is clearly one of the aftershocks. Like the performance of Geert Wilders’ Freedom Party in the Dutch election or the performance of Marine Le Pen in getting through to the second round of the French presidential election, the AfD has upset the fragile balance of domestic politics. More than six months after the Dutch election, the determination of prime minister Mark Rutte to keep the Freedom Party out of government means that as yet it has proven impossible to finalise the composition of the coalition. Angela Merkel faces a similarly difficult task to put together a coalition given that the SPD has indicated it will not continue the current arrangement. Moreover, with the leader of the Bavarian CSU faction apparently questioning whether it should continue in coalition with Merkel’s CDU, the picture has been further complicated.

The election clearly was not a Brexit moment for Germany. In that sense, we should not over-dramatise the rise of AfD. The general consensus is that it represents a protest which has gained momentum on the back of Merkel’s opening of German borders to huge numbers of refugees. Perhaps the tide of outrage prompted by the actions in 2015 may subside over time, but there should be no doubt that the German elite misjudged the domestic mood in much the same way as politicians did in the US, UK and France. Whilst The Economist does not speak for Germany, its views are very much in tune with well-educated liberal voters across the western world. But even two years ago, its editorial comment that “Willkommenskultur shows that the people of Europe are more welcoming than their nervous politicians assume. The politics of fear can be trumped by the politics of dignity” did appear a little complacent. No-one doubts that it was the morally right thing to do but Merkel’s unilateral decision enraged the likes of Hungary and prompted unprecedented border closures throughout the EU. With the passage of time, many domestic voters are beginning to wonder if it was such a good idea.

But we should not forget that AfD was originally formed as a party to protest against the Greek bailout. It was a protest movement in the truest sense. However, it morphed into something else as it attracted voters with rather more nationalist views. One of its founders was the economist Bernd Lucke who has since drifted away from the party. In an excellent overview of AfD’s rise to prominence, the Financial Times quotes Lucke as saying “[Its] views are opposite to the ones I had when I founded it …When I led it, I had the support of 7 per cent [of voters]. That doubled when they became anti-Islam and anti-immigrant.” 

Nonetheless, the surge in support for AfD was “part of a bigger shrinkage of the political centre” to quote Gideon Rachman in today’s FT. Perhaps it is more accurate to say that this represents more a reorientation of the political landscape. Voters have every reason to be unhappy with the response of their governments in the wake of the financial crisis, though some countries have more cause for complaint than others. Excessive austerity in many European economies, coupled with intensified pressures from globalisation and the use of market solutions to price people back into work (zero hours contracts in the UK, for example) have proven a toxic cocktail which eroded many workers’ faith in the present system. There is also a lingering grievance that the “elite” were bailed out during the financial crisis and that the ordinary working person has paid the price. Against this backdrop, it is not surprising that many voters feel the system is loaded against them.

US voters went for the full nationalist option in the form of Donald Trump. The Brexit vote was also partially driven by nationalism whilst the 2017 election result indicated that many British voters sought an alternative to solutions which rely on more market and additional austerity. Italian voters last December rejected constitutional amendments, in part because it was a chance to stick two fingers up to the establishment which supported the changes. Even in France, where Emmanuel Macron swept the board in presidential and parliamentary elections earlier this year, the new president’s polling ratings have dipped sharply and Macron’s party performed poorly in yesterday’s elections to the upper house, gaining only 8% of the vote.

Research by the political scientist Gabriel Lenz suggests that in the case of economic data, voters focus on the most recent evidence “in large part because of the way the news media and the government report economic statistics.” He goes on to point out that “voter behavior appears to reflect a pervasive human tendency to inadvertently substitute an easily available attribute for an unavailable one, a tendency that Daniel Kahneman calls ‘attribute substitution.’”

This explains why populists can get away with making outrageous claims: They are simply not challenged on the evidence, which allows them to propose solutions designed to placate anxious voters but which will make many of them worse off in the long-term. But as Trump, Brexit and to a lesser extent the AfD have shown, appealing to reason will not work if that is not the message which people want to hear. As Charles Dickens wrote in 1859 in A Tale of Two Cities, “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity.” Some things never change.