The results of the Social Democrats’ (SPD) vote are in. They want to be part of the ruling coalition in Germany. In the end that is no shock.
The price to do so for the political elite in Germany was high, however. SPD Leader, the odious Martin Schultz, was forced to step down. His job is done. He destroyed the SPD just enough to allow Chancellor Angela Merkel to retain power.
Schultz was put up against Merkel to ensure her victory last spring. He was John McCain/Mitt Romney to Merkel’s Barack Obama. A non-choice on core EU policy positions and worse on domestic German positions to make Mama Merkel the safe choice.
It only kinda worked and that’s why we’re where we are today.
The problem for both Schultz and Merkel arose with the German electorate ditching the SPD and switching its support to all the minor parties, most notably, Alternative for Germany (AfD), who enters the next Bundestag as the official opposition party to Merkel’s cartel government.
The Trend Ain’t Merkel’s Friend
But, the trend is firmly against this coalition government holding. Merkel will now have to reverse course completely and take talking points away from opposition party AfD to shore up support.
Those who are still members of the SPD voted for having one last kick at the governing can before sinking into irrelevancy. The kind of decline its seeing since it entered coalition talks with Merkel is terminal (see chart above).
The German population is moving in a much different direction. And regardless of securing a fourth term for herself as Chancellor (and de facto head of the EU) Merkelism is over in Germany.
Just as I said it was after the election:
Watching the rise of populist movements across Europe has been slow but steady. Despite getting Macron through in France, Front Nationale’s populist Marine Le Pen beat two of the major French parties. While we may still wind up with a “Meet the New Boss, Same as the Old Boss” scenario in both France and Germany, the populist wave in Europe has yet to crest.
The end of Merkelism is the natural result of it. It was always a dead-end political position. A federated Europe on Germany’s terms was never going to be stable for more than the generation that sold it into being.
So, while that article handicapped a re-vote in Germany the core thesis is still correct. The EU will not survive another five years of caretaker, euro-centric, government against the people’s will.
Merkel is not strengthened by this coalition. She is simply hanging on, like the SPD, to the last vestiges of power she wields. If she uses this, as I suspect she will, to go forth with plans to subjugate the Visegrads and Austria over immigration quotas, then she will have squeezed her iron fist one too many times.
Shake Up in EU Finance
Along with Schultz was the ouster of long-time German Finance Minister Wolfgang Schauble last fall. He was the first casualty of Merkel’s dismal performance in the September election.
The miserable old architect of the euro’s ruinous hollowing out of southern Europe states like Greece, Italy and Portugal is finally gone.
The SPD gets to pick the Finance Minister and that person will have a lot on their plate going forward. Today’s elections in Italy, likely to produce another cartel government of status quo, will still be something for Germany to reckon with.
Italy’s debt situation is untenable and is only functional thanks to the ECB’s bond-buying program. Rising rates in the U.S. are putting upward pressure on European rates, regardless of ECB intervention.
ECB President Mario Draghi keeps telling markets he has no choice but to continue this practice as if this is some sort of solution. Europe will not ever grow out of this situation and Germans have no interest in taking on the debt of countries they, frankly, look down upon.
The only acceptable solution to the German electorate is that the debt is repaid in full even though the interest on the debt is barely serviceable. Rising rates will only make this worse.
Since the whole purpose of the Grand Coalition just ratified is to maintain the status quo in the EU, somehow those in the SPD that voted for this coalition think this is a win for them.
They will be the ones who sell bailing out Italy, Spain, Greece etc. with German money. The alternative is just as bad, allowing any one of them to leave the euro, or threaten to kick them out, which would cause the kind of instability and chaos that would likely take down a number of European banks, most notably Deutsche Bank.
So, as always, the practice will be delay, delay delay. And the more time they delay fixing the worse the eventual blow up will be. Italy’s debt is currently 134% of GDP. The depreciation of the euro after the Swiss National Bank ended its pegging the franc to it dovetailed nicely with the ECB’s bond-buying program.
A cheaper euro provided real relief for the debt-stricken countries like Italy. It’s easier to service debt with a cheap currency rather than a strong one. But, now with the euro back above $1.20, the problem is the reverse.
It’s the same problem that got everyone into trouble in the first place, an overly-strong euro that benefits Germany at the expense of the rest of the EU.
And that’ s where the political rubber meets the road. Germany’s economy has a higher comparative advantage in the global marketplace and can suffer a higher exchange rate on the euro than Italy or Spain.
The Showdown
What’s coming is a showdown between the new German Finance Minister and Italy’s new government. If another Grand Coalition forms in Italy that sidelines the euroskeptic voices of The League and Five-Star Movement then markets will breathe a temporary sigh of relief.
European bond yields will drop a few basis points and the euro will likely not move much. But, it won’t solve the long-term problem. Germany still wants a strong euro at a moment of debt-saturation.
These two things are mutually exclusive.
Italy’s election today may not change the current dynamic that much. This will be thanks to savvy electioneering by its political elite in changing election law and calling elections early to blunt the growth of Five-Star and The League.
But, the trend is still in motion. So, buying time is not strategy but a tactic. Hope isn’t a plan either. And at this point EU leadership is hoping that they can ride out this populist wave and build their United States of Europe before it all falls apart.