German Chancellor Angela Merkel Has One Big Dilemma
Fourth terms are not kind to German chancellors. Angela Merkel, preparing to enter her fourth successive period in office after her expected victory on Sunday's parliamentary election, looks likely to be dubbed the Queen of Europe, by far the continent's most experienced and influential politician. Yet her crown will sit uneasily - a result above all of the likely parliamentary entry of the anti-euro, anti-immigrant party Alternative for Germany.
Merkel's reduced manoeuvring room in coalition-building and waning hold on power have big implications for the European Central Bank's 'quantitative easing' bond purchases that have paradoxically spurred a European economic recovery, yet undermined Merkel's core support.
Merkel's two long-lived Christian Democratic Union predecessors, Konrad Adenauer and Helmut Kohl, after final electoral victories in 1961 and 1994, both ran into progressive problems in their fourth terms, leaving office much diminished in 1963 and 1998.
Merkel's destiny may be similar. In almost any political constellation after Sunday's vote, the chancellor will be weakened. If the far-right AfD strengthens beyond the party's expected 10% of votes, she may remain in a coalition with the Social Democratic Party.
That would be a sizable disappointment compared with her target of teaming up with the CDU's traditional allies, the liberal Free Democrats, expected to re-enter parliament after a four-year absence. Some polls see the AfD scoring 12%, gaining 85 parliamentary seats.
The SPD, after a lackluster four years of power-sharing, is likely to be much more hostile to Merkel than hitherto. Furthermore, if the 'grand coalition' is renewed, the AfD - formed only four years ago - would become the largest opposition group. That would give it great influence in parliamentary proceedings and in the media, an astonishing surge for the first far-right party in the Bundestag since the 1950s.
If, on the other hand, Merkel proceeds with all alliance with the FDP - still the most likely outcome - she is likely to do so only in an uncomfortable three-way grouping with the Green ecology party, close to the CDU in some economic and industrial fields but far softer on euro issues.
The AfD's parliamentary debut, and the return of the FDP, will sharpen the tone of parliamentary debate on Europe. Both take a harder line than Merkel on issues like financial support for debtor countries and the ECB's QE policies. In famous remarks in April 2016 Wolfgang Schauble, the finance minister, attributed half the blame for the AfD's rise on ECB President Mario Draghi's easing policies that have reduced interest rates for German savers and fueled anxieties over eventual inflation.
The German election comes a month before the next ECB policy meeting on 26 October when the central bank will discuss a reduction in QE purchases next year, both because it is running out of eligible bonds to buy and because earlier deflation fears have now virtually disappeared. The ECB council will probably not formally decide an end-date for bond purchases, partly reflecting fears that - in view of German antagonism - it will not be able to restart a programme once it stops.
The AfD has been boosted by a mid-August statement from the German constitutional court explaining 'important reasons' for why the ECB's QE may be illegal. It may contravene a ban on monetary financing, overstep the ECB's mandatory limits and expose German taxpayers to unquantified financial risks.
The European Court of Justice has to answer key questions before the German court gives a verdict next year, which could render QE inoperable in about 12 months. These circumstances pose a near-insuperable dilemma for Draghi and Merkel. Setting a date for ending QE would expose Italy in particular to grave financial risks ahead of next year's parliamentary elections. Yet continuing the programme will bolster the AfD and expose further Merkel's vulnerability.
Fresh problems stem from French President Emmanuel Macron, who is pressing Germany to decide long-term means for strengthening the euro just at the time when ECB support is running out and the German parliament will become far less compliant.
-David Marsh is Managing Director and Co-Founder of OMFIF.
OMFIF is an independent think tank for central banking, economic policy and public investment.
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