Germany’s outgoing Chancellor Angela Markel has won much respect worldwide for her 16-year tenure as other European politicians have come and gone, but as flow reported last April in “Germany’s elusive recovery”¹ public confidence in both her party, the Christian Democratic Union (CDU) and its centre-right political ally the Christian Social Union (CSU) has been waning in recent months.

The outcome of the federal and state elections on 26 September was widely expected to be tight and so it proved. While the CDU/CSU alliance was credited with successfully steering Germany through the first wave of the Covid-19 pandemic – to the detriment of the CDU/CSU’s coalition partner the Social Democratic Party (SPD) – its management of the subsequent waves was regarded as less adept. Of late, commentary on Mrs Merkel’s achievements has been more critical. The Economist’s lead article of 25 September was titled “The mess Merkel leaves behind” to accompany a special report that detailed a lengthy ‘to do’ list for the next administration.²

“In her 16 years in the chancellery she has weathered a string of crises, from economic to pandemic. Her abilities as a consensus-forger have served her country and Europe well,” the newspaper conceded. “But her government has neglected too much, nationally and internationally. Germany has got away with it, for now; the country is prosperous and stable. Yet trouble is brewing. And as Mrs Merkel prepares to leave office… admiration for her steady leadership should be mixed with frustration at the complacency she has bred.”

In brief, the list of “neglected issues” include inadequate investment by the public sector in building infrastructure, particularly digital; the 2009 constitutional amendment making it illegal to run more than a minute deficit; failure to reform the pension system in the face of a fast-ageing population; and Germany’s sluggish progress on combating climate change, exacerbated by Mrs Merkel’s shutdown of its nuclear industry following Japan’s Fukushima disaster in 2011. Added to this, the newspaper views the outgoing Chancellor’s reluctance to wield Germany’s influence in Europe – for example in addressing the weakness of the EU’s indebted southern members – “has been especially disappointing”.

“In the coming years the consequences of the US-Chinese tensions, Brexit and the need to create a stronger EU demand a more proactive approach from the next government”
David Folkerts-Landau, Group Chief Economist, Deutsche Bank

Deutsche Bank’s Group Chief Economist, David Folkerts-Landau agrees that successive international crises since 2005 has “forced a rather reactive policy approach” from the Merkel government. In his 27 September Election Commentary on the result, he suggested “In the coming years the consequences of the US-Chinese tensions, Brexit and the need to create a stronger EU demand a more proactive approach from the next government.”

He continued, “This new role, which many international observers have been demanding Germany to accept for a long time, comes at a point when Germany’s economic position is threatened by adverse demographics, structural disruptions resulting from digitalisation and, most importantly, the daunting quest to reach climate neutrality during the next two decades.”

In his view, a proactive approach is “all the more important” because these challenges “also offer great opportunities. “The fact that Germany has turned challenges such as the rebuilding after World War II or reunification into tremendous success stories, makes me confident that this can be achieved again.”

However, Folkerts-Landau suggested that both achievements happened only “because politicians were smart enough to let the social market economy unfold its benefits. The challenge for the new government will hence be a dual one: defining Germany’s new international role and striking the right balance between the market economy and a strong and guiding state.”

Who will be tasked with taking on the challenge hasn’t yet been decided. The apparent election winner was the SPD and its leader Olaf Scholz, which secured a narrow victory with 25.7% of the vote against 24.1% for the CDU/CSU bloc. As Deutsche Bank’s Research Strategist Jim Reid noted in his Early Morning Reid post of 27 September, it was the first time since 2002 that the SPD won the popular vote and marked a big turnaround, having trailed in third place over the spring and summer but the worst-ever performance for the CDU/CSU, marking the lowest combined share of the vote for the two big parties in post-war Germany. It was also a record result for the Greens, whose 14.8% was up almost  six percentage points on 2017 “and puts them in a key position when it comes to forming a majority in the new Bundestag,” although they lost ground over the election campaign’s final weeks.

Whether the process takes only a couple of weeks or six months “any shifting policy stances will only become visible once the coalition agreement is finalised and approved by party member ballots”, says the Frankfurt team and it could be early 2022 before the new German government is up and running, although for fiscal policy, the preliminary budget for 2022 will be in place until a new budget is signed into law. “Pending European policy debates – including the reform of the stability and growth pact – are likely to be postponed until the new German government is in place.”

“The next federal government is likely to consist of at least three parties and will have enormous ideological differences”
Sven Afhueppe, Global Head of Political Affairs, Deutsche Bank

A Deutsche Bank presentation via Zoom on 27 September – given by Sven Afhueppe, Global Head of Political Affairs at Deutsche Bank and former Editor- in- Chief of German daily Handelsblatt and Johannes Pockrandt, Co-Head of Government & Regulatory Advocacy – noted that the Bundestag is due to reconvene within 30 days of the election; i.e. by 26 October, but whether the model is traffic light or Jamaica “the next federal government is likely to consist of at least three parties and will have enormous ideological differences,” said Afhueppe. Consequently, it is not fanciful to suppose that Chancellor Merkel might still be in office this Christmas.

He added that this would not be good news for the rest of the EU, which is keen for the new German government to be in place so the bloc can progress with decisions on issues such as combating climate change, a consistent global policy on taxation, reducing huge public debt loads around the world and digitalisation. The composition will also determine foreign policy and attitudes towards China and Russia, added Pockrandt, recalling that two years ago the FDP’s Lindner upset  Chinese leaders⁴ by visiting pro-democracy leaders in Hong Kong, while the Green’s leader, Annalena Baerbock is a strong opponent of the Nord Stream 2 gas pipeline connecting Germany and Russia.⁵

Early Morning Reid by Jim Reid (27 September)

Election commentary by David Folkerts-Landau (27 September)

Germany Blog: Scholz secures election victory – needs to win the FDP to become Chancellor by Marion Muehlberger, Barbara Boettcher and Stefan Schneider (27 September)

Deutsche Bank update on German Federal Elections – Zoom presentation with Sven Afhueppe and Johannes Pockrandt (27 September)

Sources

¹ See Germany’s elusive recovery at flow.db.com
² See https://econ.st/3ikETY6 at economist.com
³ See https://bit.ly/3CUYhTw at dw.com
⁴ See https://bit.ly/3CRgRfc at taiwannews.com.tw
⁵ See https://bit.ly/3CYHMpo at cleanenergywire.org