Fresh Headwinds for Euro Reforms? Uncertainty Dogs Europe After German Election

The French government has ambitious plans to reform the eurozone, but the German election could derail them. Faced with a surge in right-wing populism and a potential coalition with the fiscally liberal Free Democrats, Angela Merkel may not have the mandate for major changes.

French President Emmanuel Macron
AFP

French President Emmanuel Macron

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If Günther Oettinger, the European commissioner for budget and human resources, was shocked by the election result achieved by the right-wing populist Alternative for Germany (AfD), he didn't let it show. Germany's member of the European Commission knows, of course, that a solid double-digit showing for a party that has ridiculed European unification and lambasted the euro is bad news for the Continent's future.

On his way to the Berlin headquarters of German Chancellor Angela Merkel's Christian Democratic Union (CDU) on Sunday evening, Oettinger heard the initial forecast for the results of the German general election: heavy losses for Europe-friendly parties and a surge in support for the detractors of Brussels' unification plans. The result was hard to swallow, but Oettinger quickly recovered.

"We cannot allow ourselves to be daunted at this juncture," he said, adding: "I assume that Angela Merkel and her government will use the next few years to tackle the necessary reforms in Europe."

Oettinger's unflagging optimism reflects how enormous Europe's expectations are of Berlin following the election in Germany. The EU establishment in Brussels and pro-European politicians in neighboring countries saw Emmanuel Macron's election victory in France as the first step on the road to a renaissance of the Old Continent. Many hoped that Angela Merkel's re-election would generate the necessary momentum for further progress.

But Sunday's election result is not likely to fuel such lofty ambitions. On the contrary, opponents of Merkel's open-borders policies, like Hungarian Prime Minister Viktor Orbán, will interpret her party's election debacle as confirmation of their hard-line course during the refugee crisis. And the strong performance by the euroskeptics with the right-wing populist Alternative for Germany (AfD) narrows Merkel's ability to make overtures to Macron. Likewise, Germany's unique position in Europe as one of the few major countries with no far-right parties in parliament, is now also history. This puts a damper on hopes that the German-French motor will again push forward to forge a stronger, more unified Europe, as it did during the days of German Chancellor Helmut Kohl and French President François Mitterrand.

France's new president is giving a keynote speech today to more clearly illustrate his reform proposals for the eurozone, and on Thursday evening he will meet with Merkel on the opening day of the EU summit in the Estonian capital Tallinn.

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In the eyes of many Europeans, the stakes could not be any higher. After years of decline in Southern Europe, and after the devastating Brexit vote and the election of Donald Trump as U.S. president, many Europeans aspired to imbue Europe with a new sense of confidence.

The problem is that, in contrast to France, European policy played virtually no role in the general election in Germany. Consequently, the election result doesn't give Merkel a mandate for radically restructuring the EU in line with Macron's ideas. Furthermore, if she is to govern in a coalition that includes the fiscally liberal Free Democratic Party (FDP), she will have to take into consideration the agenda of a party that is considerably more skeptical of Europe than her current coalition partner, the Social Democrats (SPD). Is the rebounding FDP dashing all hopes of a series of reforms this fall in the EU?

During an interview at a hotel in the European Quarter in Brussels conducted about a week before the German election, Alexander Graf Lambsdorff played the great conciliator. Yet it is his FDP, which likes to style itself as a pro-European party, that is causing grave concern abroad and in the markets. Blackrock, the asset management firm, recently argued that bond markets could react with risk premiums for debt-ridden countries if the FDP entered the government. And, according to an article in Le Monde, even French President Macron confided to a visitor at Elysée Palace that he was afraid of the FDP having a role in Merkel's next government: "If she joins forces with the liberals, I'm dead," he reportedly said.

Lambsdorff served in the European Parliament for 13 years and is now entering the German parliament, the Bundestag. If the FDP attempts to gain the post of foreign minister, insiders believe he could become Germany's top diplomat. "From our perspective, there is no reason for concern," he said.

Merkel's Dilemma

But things could still come to a head over the question of how Berlin should react to Macron's proposals to restructure the eurozone. Before the election, Merkel and her SPD challenger Martin Schulz appeared open to the Frenchman's ideas of appointing a European finance minister and creating a separate budget for the monetary union. But during the election campaign, the FDP fervently warned against the dangers of opening a "money pipeline from Germany" to Southern Europe.

The crucial question now is how Merkel will proceed. During the campaign, she sought to benefit from the Frenchman's shining popularity and refrained from giving the cold shoulder to the man who so convincingly vanquished his populist challenger, Marine Le Pen, of the right-wing Front National. "In every beginning there is a bit of magic," quipped the normally rather dispassionate chancellor.

Now she finds herself in a dilemma. Macron is insisting upon a deal that he has been offering the Germans for months now: France will reform its economy and, in exchange, it expects concessions on the restructuring of the eurozone. The Frenchman is unlikely to give Merkel a reprieve as she struggles to form a government in the coming weeks. To make matters worse, the Frenchman's tight timeline doesn't fit with Germany's schedule. The negotiations for the formation of a new governing coalition are unlikely to even begin before state elections are held in Lower Saxony on Oct. 15.

In early September, Macron presented his sweeping vision of Europe in front of an impressive backdrop in Athens. He announced nothing short of a total makeover for the EU, and indicated that he would settle for nothing less. Speaking in front of the Acropolis, he cited Pericles and Hegel, adding that Europeans should debate their notions of Europe in a series of "democratic conventions."

Macron's goal is to make money available to countries faced with a crisis without subjecting them to the strict conditions required by a program under the European Stability Mechanism (ESM), the eurozone's bailout fund. To achieve this, he is proposing a separate budget for the eurozone.

A hypothetical example would be Ireland, if the country was particularly hard-hit by Brexit and its economy started to falter. The suggested model would be similar to the rainy day funds in the U.S. that benefit cash-strapped states, but require repayment later. Merkel has remained rather mum on the issue. In late August, though, she conceded that it would of course be possible to consider the appointment of a "European economic and finance minister" and the creation of a budget for the eurozone.

This fell short of a commitment to Macron, especially considering that the proposals put forward by the Frenchman -- entirely in the tradition of his country -- have taken on massive proportions. His proposed budget would include several percent of the eurozone's GDP, with each percentage point worth approximately €100 billion ($119 billion). It remains to be seen where Macron expects to find the money to finance this. The fear in Berlin is that with his extra budget the Frenchman intends to open the door to permanent transfers and that he intends to finance this with jointly held bonds -- in other words, Eurobonds.

On the other hand, Merkel cannot simply leave Macron hanging forever. The chancellor knows that the current calm in the eurozone could turn out to be deceptive. Spain could slide back into crisis in the wake of Sunday's planned independence referendum in Catalonia, and Italy, the third-largest member of the eurozone, is threatened with the prospect of a party heading its government after next spring's election that is contemplating an exit from the monetary union.

A German Proposal

One way of accommodating Macron has been proposed by German Finance Minister Wolfgang Schäuble, who has been toying with the idea for quite some time now of expanding the ESM into a sort of European monetary fund. "The German Finance Ministry has the copyright on this," he recently boasted with pride at a meeting of EU finance ministers in Tallinn. The fund would be administered by the ESM. And the new mandate for the ESM would allow Merkel's right-hand man to pursue an old objective, namely that the European Commission, which Schäuble accuses of negligence as the supreme regulatory agency overseeing the Stability and Growth Pact, would have to contend with a powerful rival.

The technocrats in Brussels intend to prevent this at all costs, particularly since officials in the European capital are already afraid that Germany and France could decide the future of Europe among themselves. In early December, the Commission intends to present its own ideas, including a proposal for the future of the ESM. During that very same month, leaders of the eurozone countries plan to discuss the matter.

In his recent speech on the state of the European Union, Jean-Claude Juncker threw down the gauntlet. Just a few days before the German election, the European Commission president suggested -- with an infallible sense of timing -- that Romania and Bulgaria should immediately enter the border-free Schengen zone. In doing so, Juncker provided the AfD with additional ammunition during the final hours of the election. But above all Juncker claimed Macron's euro finance minister for his own organization. He proposed that a Commission vice president who is responsible for financial policy should head the Eurogroup and bear the title of finance minister.

Juncker had previously discussed his ideas with Merkel during a lunch in Berlin, which is hardly surprising since the chancellor is widely viewed as the shadow ruler of the Continent. European leaders remain largely unaware, though, that back in Germany Merkel has to grapple with such mundane things as the country's never-ending efforts to improve nursing care for the elderly.

Now politicians in Brussels may have to get used to a new tune from Berlin. "It is an illusion in Brussels that everything will be better after the election," says Fabio De Masi, a member of the European Parliament with the Left Party who will soon have a seat in the new Bundestag. His comments are echoed by Guntram Wolff, the director of the influential Bruegel think tank in Brussels, who says that "with the AfD and FDP, far more than 20 percent of the members of the next Bundestag will, to varying degrees, take a critical view of Europe's bailout policies," adding that "this will have consequences for the members of parliament from other parties, particularly Merkel's conservatives."

This brings to mind how Merkel's coalition with the FDP between 2009 and 2013 was constantly in danger of losing its absolute majority in parliament at the outset of the euro crisis, when politicians were debating bailout packages for Greece and the introduction of the ESM bailout fund.

To make matters worse, the AfD's strong showing is a bitter setback for defenders of the European ideal. There appeared to be a glint of hope on the horizon after the unexpectedly weak election result for Geert Wilders, the leader of the Dutch far-right Freedom Party, and Le Pen's defeat in the French presidential election. Consequently, many hoped that the German general election would provide a third resounding defeat for Europe's right-wing populists. Now, in addition to getting into the German parliament, AfD has become the country's third-strongest political power.

The next shift to the right may take place in Austria in October. The chairman of the parliamentary group of the center-right European People's Party (EPP) in the European Parliament, Manfred Weber -- who is a member of Germany's Christian Social Union (CSU), the Bavarian sister party to Merkel's CDU -- is already warning that anti-EU parties could gain a majority in the European Parliament during the EU elections in 2019. "The result also shows that we have a long way to go before we have defeated populism in Europe," says Weber.

Luxembourg's Foreign Minister Jean Asselborn says, straight up, that although he has no doubt that democracy in Germany is strong enough to cope with the AfD, he nevertheless sees the first entry of right-wing populists in the Bundestag as a turning point for Europe. "It is unsettling and shocking for a European," says Asselborn, "that more than 70 years after the end of the war neo-Nazis have seats in the German Bundestag."

Translated from the German by Paul Cohen

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