German stalemate: the leader of Europe votes for a quiet life

The German federal elections were inconclusive, though signalling a leftward lurch. The richest country in Europe mainly wants a comfortable but quiet life, says Victor Hill.

An absence of debate

The German election campaign was dull. The political personalities were anodyne. The policy packages were insubstantial. The result was inconclusive.

Outside Germany, the most effusive political ‘anoraks’ could be forgiven for having found the latest German federal elections of last Sunday (26 September) a non-event. It was of interest to know who might succeed Angela Merkel who has been Bundeskanzler

(chancellor) for almost exactly 16 years – the longest-serving, post-war, European head of government (apart from Vladimir Putin, of course). But we may not even know the answer to that question before Christmas. And, in the meantime, Mutti (mummy, in English), as Frau Merkel is known in Germany, stays on as caretaker.

But don’t take my word for it. Look at what the veteran German journalist Wolfgang Münchau had to say, writing in last week’s Spectatorⁱ. He spoke about “the almost total lack of ideas” expressed by the German political class during the campaign. In the various televised leaders’ debates there was no mention of the Afghanistan debacle – nor any foreign-policy issue at all, for that matter. There was no discussion about the future direction of the EU (perhaps the Germans have outsourced all that stuff to the French). Wolfgang Münchau described Frau Merkel’s attitude towards Brussels as one of “benign neglect”. He suspects that that approach will be continued by her successor.

Nor was there any mention of Germany’s digital backwardness, as compared to its neighbours. German business is the last redoubt of the fax machine. And Germans are not into social media as much as many of their neighbours are. There are fewer Germans on Facebook than there are in Turkey – a country of equivalent populationⁱⁱ.

Germans love trees – Germania was the impenetrable ancient forest that held the Romans at the Rhine-Danube frontier. But they also love cars. Most Germans are opposed to a speed limit on the nation’s autobahns; and many are sniffy about curtailing the sale of new petrol and diesel cars after 2030. German ‘Greens’ tend to be conservatives – conservationists – rather than the ‘Red-Greens’ in the UK and France. They want a more assertive approach with Russia and China. Both the Green Party and the SPD want to raise the minimum wage from €9.50 per hour to €12 (about £10). That was about the limit of the debate.

What happened?

There were four leading parties in the contest – the Christian Democrat CDU/CSU (roughly conservative) led by Armin Laschet; the SPD (social democrats) fronted by Olaf Scholz; the Greens led by the gaff-prone Annalena Baerbock; and the Free Democratic Party (FDP – free market, pro-business) led by Christian Linder. None of these parties offered a tangible agenda for change. The FDP wants to champion young entrepreneurs and the Greens want to prioritise climate change. The Greens also want to bring forward the date of Germany’s becoming carbon neutral from 2045 to 2035 – an ambitious and probably unfeasible target.

As it turned out, the SDP came top with 25.7 percent of the votes and the CDU just behind with 24.1 percent – its worst result ever. The Greens, who had led the polls back in the early summer, scored just 14 percent and the FDP won 11 percent of the vote. There were two also-rans as well. The anti-immigration Alternative für Deutschland Party managed 10 percent and now dominates all of Saxony and Thuringia. The far-left Die Linke Party, led by Janine Wissler, polled just 4.9 percent.

Herr Scholz has already staked his claim to be the next chancellor, though if that is the most likely outcome it is still far from certain. A cause for confusion is that, while Herr Scholz is the SPD’s candidate for the top job, he is not the party’s leader. When he ran for the party leadership two years ago, he was defeated by a Momentum-style campaign which succeeded in installing Saskia Esken and Norbert Walter-Borjans, two little-known figures from the hard left. It’s as if Tony Blair were beholden for policy to the Corbynistas.

There will have to be a coalition. But what sort of coalition? The centre-left SPD will probably attempt to form a ’traffic lights’ (green-red-yellow) coalition with the Greens and the FDP. These three parties all gained votes relative to the last federal election in 2017. Such an alignment would command 416 seats in the 735-seat Deutscher Bundestag – so would enjoy a comfortable and durable majority. In this case, Angela Merkel’s CDU, which has been in government since 1983 with one short interregnum, would be forced into opposition.

The consensus is that the CDU’s Armin Laschet had a lacklustre campaign. The political skills he exhibited as minister-president of North Rhine-Westphalia were absent on the hustings and the CDU’s initial, hefty poll lead was squandered. When he visited Erfstadt, the epicentre of the recent catastrophic floods in the Rhineland, he appeared to have a fit of laughter. He has already conceded that, whether the CDU ends up in government or not, the party needs “renewal”. He now faces recrimination within his own party and may be contested as leader soon. One possible contender is Jens Spahn, the outgoing health minister.

A traffic-lights coalition would mean more spending on green energy. Any SPD-led coalition is very likely to raise government spending. All the traffic-light parties are sympathetic to further European integration and the principle of a European army. Though whether they wish to pay for increased defence spending is doubtful.

Market reaction

The German equity market hardly reacted at all, expecting fundamentally more of the same. By Monday morning it was clear that the proto-communist Linke (which opposes both the EU and NATO) would be shut out of any coalition talks. The DAX rose by a sober one percent before later falling back and closing just 0.3 percent up.

On the same day, European Central Bank President Christine Lagarde assuaged markets by playing down the threat of inflation. She said there were only “limited signs” of prolonged materials shortages and high wage demands. But then she always was an optimist when she ran the IMF.

Berlin syndrome

In Berlin, which is one of Germany’s federal states as well as being the nation’s capital city, 56 percent of voters backed a proposal to forcibly buy up housing owned by property investors. This follows a campaign against rising rents. If this goes through it could mean that 226,000 privately owned apartments will be purchased by the state government.

The questions, of course, will be: at what price, and how will this be financed?

Gas pressure

One issue that the new German government will have to address immediately is the Nord Stream 2 pipeline (NS2). This project is now finished yet not operational because it does not have the necessary EU-level and German regulatory approvals to sign off. Russian energy giant Gazprom declared last week that the £8bn, 1,230 kilometre/ 745-mile-long pipeline was complete. A Kremlin spokesman called for the pipeline to become operational “as fast as possible”.

This project is controversial. The pipeline was financed and facilitated by numerous western companies including Shell (LON:RDSA) and Engie (EPA:ENGI). Frau Merkel’s SPD predecessor as chancellor, Gerhard Schröder has sat on Gazprom’s board. In 2016 he also became chairman of the board of NS2. He then became chairman of Russia’s state-controlled oil producer Rosneft (MCX:ROSN), even though the company was subject to EU sanctions. BP (LON:BP) still owns 19.75 percent of Rosneft – though how much executive control they wield is debatable. Herr Schröder’s chumminess with Vladimir Putin makes many Germans feel uncomfortable.

About 40 percent of Europe’s gas comes from Russia. There have been many accusations of late that the spike in gas prices across Europe arises because Russia is manipulating supply in order to pressurise the EU authorities to win final approval. Even the nominally neutral IEA thinks that Russia could do more to bolster supplies. Others claim that the Russians have been obliged to redirect LNG (liquefied natural gas) supplies to Asia, given rampant demand there. Interestingly, it turns out that a lot of the NS2 gas will be sourced from relatively new fields in the Arctic (Yamal Peninsula) rather from eastern Siberia.

The German Greens have opposed NS2, as have the Free Democrats for geopolitical as well as for environmental reasons. If there is indeed a traffic-lights coalition then Herr Scholz may have to make concessions on NS2. This prospect is already worrying the Russians. The Green party leader, Frau Baerbock may even end up as foreign minister – an appointment that would complicate Russo-German relations. She told Germany’s Frankfurter Allgemeine recently: “I still think the pipeline is wrong for reasons of climate policy but above all for geostrategic reasons”. For his part, the FDP leader Herr Linder said he would support the project only “when the Russian people have elected a democratic government”.

The fact is, however, that if Russia, further to the opening of Nord Stream 2, decides to cut off Ukraine and Poland, there will be a marked rise in tensions in eastern Europe – one that even pacifist-inclined Germany will have to adjudicate.

Salient issues: climate and Europe

Herr Laschet hails from Aachen – where Charlemagne ruled over the Carolingian empire which roughly spanned the territories that now make up France, Germany and the Benelux countries. Modern Aachen is surrounded by three huge, open coal mines. The Hambach mine is the largest coal mine in Europe. Herr Laschet, the son of a coal miner, was indulgent to the coal industry as minister-president of Nord Rhine-Westphalia. He now looks like a man of the past.

The issue of how to manage the single currency will most likely come to the fore in the next two years. Frau Merkel’s attitude was that it would be ‘alright on the night’. Post-pandemic, the debt-to-GDP ratios of the European south are even worse than before. Back in 2012 Frau Merkel was so unforgiving to the debt-laden Greeks that a crowd hanged her effigy in Athens. But another wave of enforced austerity might now ensue, which will have political repercussions.

The Germans have a deep-seated loathing of inflation but for the last two years they have had to put up with a rate of inflation that is above the eurozone average. How the new government responds to the incipient inflationary surge that is now upon us will be critical.

Prognosis

Critics of Herr Scholz claim that he is a ‘Trojan horse’, leading a party which has shifted profoundly towards the left in recent years. The SPD has already pledged to raise income and inheritance tax and to introduce a wealth tax on personal assets over €2m. SPD co-leader Herr Walter-Borjans last year demanded a land-appreciation tax which would force all homeowners to pay tax annually on any capital appreciation on their houses. Deputy party leader Kevin Kühnert has called for private landlords to be prevented from renting out homes. He also favours the nationalisation of Germany’s iconic automotive brands such as BMW (ETR:BMW). The Greens want higher taxes too – so that now seems inevitable.

That is why wealthy Germans have reportedly been quietly shifting assets across the border to Switzerland – beyond Berlin’s reach. They know that SPD’s future policy is formulated not by the affable Herr Scholz but by the hard-left caucus that runs the party.

But whoever becomes Bundeskanzler, Germany is unlikely to square up to the deep structural challenges the country faces.

First, the country is over-reliant on manufacturing in the information age. It has pursued a mercantilist policy of boosting exports and thus accumulating a trade deficit that has caused dangerous imbalances within the single-currency area. The trade surplus will be around seven percent of GDP this year – but that, while impressive, does nothing to make ordinary Germans feel better off. Before the single currency, Germany’s trade surplus was kept in check by an appreciating Deutschmark.

Second, Germany’s growth rate is sluggish. Most of the growth in the German economy under Frau Merkel came in her first five years and before the financial crisis. The constitutional mechanism which requires the government to balance the budget has starved new infrastructure investment. The rule limits the country’s structural deficit to 0.35 percent of GDP. German fiscal policy has thus been unnecessarily restrictive − and the SDP remains vague on what it wants to do about the debt brake. The golden age of the Wirtschaftswunder (‘economic miracle’) was from the 1950s and 60s. Since the financial crisis, Germany’s growth rate has been moderate.

Third, Germany’s huge manufacturing sector is disproportionally skewed to the automotive industry which is, of course, in rapid transition, given the electrification agenda. It’s not yet clear whether VW and BMW will be able to out-Tesla Tesla (NASDAQ:TSLA).

Fourth, the German energy sector is overly dependent on coal (which is soon to become a no-no in a world of accelerating climate change), as well as on Russian natural gas. Even if the Greens do not end up in the prospective coalition, the new government will have to reformulate energy policy, according to the Federal Association for Economic Development and Foreign Trade.

Fifth, Germany is just not gearing up for the age of AI, robotics and quantum computing. The country has just 18 ‘unicorns’ (tech start-ups prospectively valued at more than $1bn). The UK has 100.

I wrote over the summer that Angela Merkel’s chancellorship was a missed opportunity for Germany and Europe. These federal elections were a missed opportunity too. Germans, like the French, devoutly wish to be modern – but they don’t want to be modernised.

The leadership of Europe will now devolve to Paris where President Macron will pose as Europe’s saviour in the first half of 2022. That will most likely assure his re-election next May. The most powerful German politician in 2022 will then be Ursula von der Leyen, the president of the European Commission (who was President’s Macron’s first choice for that post). Only last week Frau von der Leyen, who was the German defence minister under Frau Merkel, called for a European Defence Union: “It is time for Europe to step up to the next level”, she declared. That battle – which I outlined last week – has already started.

The brilliant, world-historical nation of Luther, Goethe, Marx, Hegel, Schiller and Nietzsche (not to mention its incomparable composers) is too afraid to become assertive and too conservative to reform. But the strategy of keeping on doing what worked in the past no longer works when the world changes.

Listed companies cited in this article which merit further investigation:

• Engie (EPA:ENGI)
• Rosneft (MCX:ROSN)

i Available at: https://www.spectator.co.uk/article/the-stalemate-election-can-germany-move-beyond-merkel {paywall}

ii See: https://www.statista.com/statistics/268136/top-15-countries-based-on-number-of-facebook-users/