Merkel’s Almost-But-Not-Quite-Decisive Victory Is Bad News for the Eurozone

Pretty much from the start of the Euro crisis, it has befuddled, annoyed, and increasingly angered Germany’s partners that Angela Merkel, the country’s chancellor, appeared to pay more attention to the sentiments of German voters than to the opinions of renowned economists, elder statesmen, and business leaders. Merkel’s crushing of her opponents in yesterday’s general election shows the political savvy of her strategy—and spells trouble for Europe and the global economy.

Let’s quickly recap results. Merkel’s CDU boosted its vote tally compared to four years earlier by eight percentage points to 41.5%, leaving the main opposition Social Democrats a distant second at 25.7%. No wonder she is jubilant and destined to lead the next government. Polls suggest that her refusal to expose German taxpayers to additional bailouts for “PIGS” countries (Portugal, Ireland, Greece, and Spain), her rejection of Eurobonds, and her foot-dragging on a banking union all boosted her standing with voters. While other issues mattered in the election as well, none loomed larger than the implications of the Euro crisis. Only one conclusion can be drawn from Merkel’s strong showing—a large number of German voters strongly endorse the chancellor’s handling of the Euro crisis and support her approach of forcing change through pain. The narrative that peripheral Eurozone countries are paying the just price for earlier prolificacy is as firmly entrenched in Germany as ever.

As countless experts have pointed out, that narrative is in large parts wrong. Unlike Greece, Ireland and Spain were not bankrupted by reckless government spending and endemic tax evasion. As recently as 2007, Spain had a budget surplus. What brought both countries to their knees is the exorbitant cost of recapitalizing their financial systems, a need that arose when real estate bubbles collapsed that had been fueled by negative real interest rates and German excess savings looking for a decent return abroad. Structural flaws in the design of the common currency, persistently lackluster German domestic consumption, and a shocking lack of domestic investment in Germany have as much to do with the troubles in the Eurozone as bad choices in Europe’s periphery.

Most economists suspect that Angela Merkel knows all of this. They certainly know that her advisers know. This is why European leaders, the Obama administration, and investors around the world had hoped a decisive election victory would give Merkel the political freedom to drive Europe’s crisis response in a different direction, one that would balance consolidation with growth, establish shared responsibility for at least some slice of Eurozone government borrowing, and complete a banking union. Yet this is where Merkel’s almost-but-not-quite-decisive victory becomes the problem. Drawing a lesson from the Weimar Republic, where parliamentary fragmentation made the country at times ungovernable, Germany’s post-war electoral law only gives parliamentary representation to parties achieving at least 5% of the popular vote. In yesterday’s election, a number of parties fell just short of that threshold, including Merkel’s junior coalition party, the free market FDP, which for the first time since 1949 failed to win representation at the national level. A new upstart party determined to throw Greece out of the Euro also just fell short, obtaining 4.7% of the votes. The electoral arithmetic brought Merkel within a whisker of an absolute majority of seats, something not achieved since Konrad Adenauer’s third victory in 1957. In the end, Merkel’s CDU fell just five seats short—an almost-decisive victory, but not quite. She can now govern in the minority, something that is unlikely given the country’s distaste for uncertainty, or form a coalition either with her party’s archrival Social Democrats or with the Greens. Everybody has pledged to shun the fourth party in parliament, the ex-communist Left Party.

Neither the Social Democrats nor the Greens are keen to join Merkel’s CDU in government. Most bets are that the Social Democrats will eventually agree to serve as junior partners, probably after long and tedious negotiations. The memory of the last “grand coalition” of left and right led by Merkel from 2005 to 2009 are still fresh. It ended with a crushing electoral defeat for the Social Democrats after they obtained only 23% of the vote, losing almost a third of their voters from four years prior. This is why leading Social Democrats already suggest that the party, even if it joins the government, should remain the principal source of opposition to Merkel. And that means Merkel will not have any political buffering after all. Her status as the most popular politician in Germany will remain her principal source of power, even though her party is towering above all others in parliament. So don’t expect any radical course correction. Don’t expect her to suddenly tackle Germany’s growing economic woes. Don’t expect her to become the engine of institutional reform Europe urgently needs. Rather, she will keep her finger on Germany’s popular pulse, even if that means more pain at the periphery, more uncertainty in the core, and a continued slide of Europe’s economic and political weight in the world.