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Monday, 23 October 2017

The German consensus

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Anthony Peters on what Merkel’s victory means to Europe and euro-scepticism

Anthony Peters

Anthony Peters, SwissInvest strategist

It would have taken either a very brave or a very foolish man to bet against the comprehensive election victory which Mutti Merkel and her CDU/CSU partnership scored yesterday and it would also not have taken a degree in rocket science to work out that the FDP was on its way to its own most humiliating defeat since the foundation of the Federal Republic in 1948.

Markets certainly expected nothing different as their sanguine response to the outcome has proven. With exception of a small and temporary pop in the euro when it looked possible that Merkel might achieve what is conventionally regarded to be impossible and to win an absolute majority in the Bundestag, in market terms the election has been one big yawn. However, away from that, there is plenty for the rest of Europe and the rest of the world to look at and to contemplate.

After a period in which, pretty much across the whole of Europe, whichever clueless bunch has been in government has been turfed out and replaced by an equally clueless opposition at general election time, Germany has delivered a very different outcome. Initial responses will without a doubt focus on the idiosyncratic position in which Germany finds itself as it has prospered economically throughout the ongoing eurozone crisis. Observers would be well advised not to forget that the crisis is far from over but that it has very consciously been kept out of the news throughout the run-up to these elections, not only by both sides of the political debate in Germany but by the rest of Europe as well as nobody has wanted to rock the German boat.

Germany finds itself, in some ways, with the same dilemma as does China. It merrily lends to the largest buyers of its goods – 35% of exports go to the eurozone – so that they can buy its goods. If it stops, its economy goes out of kilter. Whether this will prove to have been a prudent, sound and sustainable model for growth and prosperity will be the problem for the next generation to wrestle with and as we have learnt in the past decade, we should not let minor details such as that worry our pretty little heads.

The Old Middle, The Greens and Energy

However, there are other aspects of the election which I find interesting and challenging. Most commentators are happy to accept that due to its economic position the political landscape in Germany is very different to that of the rest of the eurozone and that, therefore, we can treat the events there as idiosyncratic. I am not so sure. The disappearance of the FDP from the Bundestag – one Germany client of mine logged on his Facebook page “At last the FDP is where it belongs” – means that the party of the middle has fallen victim to the centripetal force which is sweeping modern politics. As the mainstream left and right fight over the middle ground, the old middle goes to the wall. All the while, as the old left and the old right cede their traditional ground, new fringes pop up to fill the vacuum with single issue politics.

It was, remarkably, Germany where this first happened. Although the Germans are the masters of consensus politics (where else would the majority of voters hail a hung parliament and a grand coalition as the best of all possible electoral outcomes?) it was there that a lunatic fringe party first took root and prospered as part of the principal political landscape. I am thinking of the Greens. I recall them when they were still seen as a mad and sad bunch of tree-hugging losers (some people still do think of them that way) but they have slotted into the political process, have shared in government, and until the black/red coalition agreement between the CDU/CSU and the SPD is signed, there is still a possibility of a black/green marriage.

Although we are all still curious to see how Merkel will face up to the fiscal challenges of the Club Med’s needs, the Chinese analogy assures me that there is nothing immediate to worry about on that front. The country can less afford to cut financial support to its customers than it can afford to maintain it. I am far more concerned as to how she will tackle German energy policy. The legislative obligation to decommission its entire nuclear generating capacity leaves this manufacturing powerhouse with a serious risk of blacking out – another critical issue which was gently skirted around during the election process. A black/green coalition would most likely result in a total gridlock on energy which strengthens the hand of an otherwise weak SPD in the coming coalition horse-trading.

No to euro-sceptiscism

Much has been made of the Alternative fuer Deutschland (AfD) euro-sceptic party. With a very modest count of 809,000 first votes it fell well behind the Communist Linke (3.5mm, ahead of the Greens) and even the Pirate Party (962k) but it did garner over two million secondary votes which still left it well away from winning any seats. In other words, it is a political irrelevance, although, as I noted above in the context of the Greens, today’s lunatic fringe may quite possibly be a part of tomorrow’s government. However, if a week is a long time in politics, four years is a lot, lot longer.

The British would be well advised to note that the hoped for rise of euro-scpeticism in Germany has not occurred and that they need not expect much support from Berlin as they try to redefine their relationship with the rest of the Union. Although Nigel Farage, founder and boss-man of the United Kingdom Independence Party, made eminent sense when giving the key-note speech at UKIP’s annual conference, nothing can detract from the fact that there is not much behind him in terms of intellectual and political manpower and hence little to commend the party as a serious and credible political movement. Many, myself not included, might regard this to be a shame but it is as far as I can tell an inalienable truth.

So, what knowledge do we extract from the Bundestag elections? Nothing other than “steady as she goes”. Does having this election out of the way remove any elephants from the eurozone room? No it does not. However, how, when and even if the key fiscal issues in the PIIGS resurface has yet to be seen.

Other than that, keep on borrowing and keep on bailing.

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