Chancellor Angela Merkel’s re-election in September is good news for Germany and for Europe, but the election results are a double-edged sword.
On the one hand, Merkel garnered a greater percentage of the vote than any candidate since Helmut Kohl’s post-reunification victory in 1990, and she did so as a two-term incumbent weathering a global recession. This was a resounding victory for Merkel personally and a vindication of the economic initiatives that she championed in her first two terms as Chancellor. Few remember that just a decade ago, Germany was the “sick man of Europe,” suffering slower economic growth than its neighbors to the south. Then, at the end of Chancellor Gerhard Schroeder’s term, Germany underwent a series of Reagan-Thatcher-style regulatory reforms (primarily of its labor-market rules) to stabilize unit-labor costs. The results were striking: Within two or three years, Germany had left its sickbed and was on its way to becoming the colossus of Europe. Merkel seized on this momentum when she came to office in 2005 and made Germany the undisputed, if reluctant, leader of Europe.
On the other hand, the victory of Merkel’s Christian Democratic Union (CDU), came at the cost of cannibalizing the Free Democratic Party (FDP), which had previously been its coalition partner. Because the FDP failed to meet the 5% hurdle, it did not win a single seat in Parliament. The CDU, with its sister party, the Social Democratic Party (SPD), came up just short of a simple majority. And so it is now forced to find another coalition partner that will inevitably be more liberal than itself—either the Greens or the center-left Social Democratic Party (SPD).
This shift to the left places Merkel’s hard-won achievements in jeopardy, particularly if the SPD, which campaigned on a tax and spend platform, were to lay claim to the finance ministry post now held by CDU member Wolfgang Schäuble.
Much is at stake. Under Merkel’s leadership, Germany’s gross domestic product (GDP), exports, and employment rate have all risen. And as the U.S. Congress gears up for another exhausting debt ceiling fight, on the other side of the pond, Germany continues to benefit from record-breaking unemployment rates and a much more robust economy than its southern neighbors. Despite pressure to rely on more regulation and higher taxes to improve Germany’s fiscal outlook, Merkel’s success is attributed to an unrelenting dedication to pursuing free-market values and cutting red tape.
The next coalition government could undermine these achievements and push counterproductive policies like a national minimum wage, which would endanger jobs, or an EU financial transaction tax, which the FDP opposed, and which the SPD has declared a high priority. As Andrea Nahles, the SPD’s general secretary warned, “we can’t go back to the party with empty hands.”
Backsliding would hurt not only Germany but the European Union that has been leaning so heavily on it.
The uncertain future of Merkel’s reforms is further complicated by Germany’s current need for a new generation of government reforms to maintain its upward trajectory. Germany today confronts an aging population, overreliance on exports and inadequate domestic demand, high energy costs, and a failure to adequately deregulate the service sector.
Despite these challenges, the basic outlook on Merkel’s third-term is positive.
German industry breathed a sigh of relief upon her reelection despite the defeat of the pro-business FDP. And Merkel, who demanded fiscal reforms in exchange for aid to debt-ridden EU member states during her second term, has maintained pressure for fiscal reform in Greece since winning reelection.
Merkel begins her next term with opportunities to strengthen Europe as a whole. In addition to establishing Germany as the global role model for fiscal responsibility, her leadership on achieving free trade agreements should not be ignored. Her reelection promises to continue the momentum behind Merkel’s signature initiative, the Transatlantic Trade and Investment Partnership (TTIP), an endeavor to which Germany has remained committed despite slow motion from other member states, such as France. A successful TTIP would spur further economic growth in Germany. And on a larger scale, achieving free trade agreements would improve the economies of both the United States and the European Union.
Merkel’s reelection gives cause for hope that a coalition government may be able to carry on the work in Germany and in Europe that Merkel set in motion when she took office in 2005. The challenge will be to maintain forward progress without diluting the pro-competition achievements that account for Merkel’s popularity.
Although skeptics may doubt the capacity of any E.U. member state to achieve deregulatory goals in the current economic climate, Germany demonstrates that such changes can take place during trying economic times and that they can make a difference quickly.
C. Boyden Gray was U.S. Ambassador to the EU from 2006 to 2008. He is a member of the Board of Directors of The European Institute.