EconoMatters

Why S&P’s Latest Call on Germany Misses the Mark

The emergence of some right-wing populists will not paralyze Germany’s pro-euro policies.

Alternative for Germany Party (Credit: De Visu Shutterstock.com)

Takeaways


  • Does the rise of a populist protest party in Germany threaten to paralyze Germany's pro-euro policies?
  • Berlin does not want a major fiscal stimulus. But that has nothing to do with AfD.
  • When big decisions on the euro are made, the AfD will not be a constraint on Germany’s policies.

Does the rise of a populist protest party in Germany threaten to paralyze Germany’s pro-euro policies?

An S&P report claims that it will do so. According to the rating agency, the gains for the right-wing AfD in recently held German regional elections could force Chancellor Merkel to take a harder line on Europe.

S&P’s train of thought seems to be gaining traction, mostly among euro skeptics. However, these concerns are simply misguided.

Having failed to make it into Germany’s national parliament a year ago, the populist AfD scooped up between 10% and 12.6% of the vote in the EU election in May as well as in recent regional votes in three smallish East German states.

Populist protest parties have come and gone in German regional elections over the decades. The risk that the AfD may have more staying power than the previous outfits is a potential longer-term problem for Merkel and her CDU/CSU party.

However, a 10 – 12.6% share in regional votes is not really a scary upset. This is not going to cause Angela Merkel to adjust her signature policies of the last four years regarding Europe.

I see four reasons for that assessment.

Four reasons

1. The recent rise of the AfD is not about the euro. Yes, the AfD started as an anti-euro group. But that did not give it any significant traction in Germany beyond the 3% mark in opinion polls. Because of that, the AfD changed its tack and turned more into an anti-immigration and a general right-wing protest group. (In that sense, it is somewhat similar to UKIP in England.) That has given the party broader appeal.

2. Most of the recent gains for the AfD did not come at the expense of Merkel’s CDU/CSU. The AfD is attracting discontents from all political camps as well as from previous non-voters.

3. Most important, the overall principles of Germany’s European policies are rooted in deep-seated convictions held by political leaders across all major parties.

The German parliament has regularly endorsed these policies with majorities of 80-85%.

Moreover, the parties strongly backing this Germany-wide consensus won more than 80% of the popular vote in the election that counted, the last federal election in September 2013.

4. This pro-European consensus within German politics and society can only be strengthened further by the external threat to European values that manifested itself in Putin’s aggression against Ukraine.

Although EU members will always bicker over the correct course of action on any issue, external threats strengthen the determination to hold the lot together.

That a deputy leader of the AfD takes a clear pro-Putin stance only adds to the reluctance of German mainstream politicians to lean the AfD way.

Why Merkel won’t take the bait

Chancellor Merkel is a shrewd politician, acutely aware of the popular mood. But even more so, she is a strong leader. She has shown time and again in the euro crisis that, if she considers it necessary, she will do things that seem unpopular at first glance.

In this vein, she backed putting a lot of German taxpayer money on the line for Greece, Ireland, Portugal, Spain and Cyprus. She seems largely pleased with the resulting reforms at the euro periphery.

Merkel has backed the ECB on the decisive OMT program, even against the Bundesbank’s preferences. While her stance may not always be fully popular, most Germans actually appreciate that, as a leader, she occasionally does things which may not be immediately popular.

Berlin is opposed to ECB “quantitative easing” for the time being, Berlin does not want a major fiscal stimulus. But that has nothing to do with AfD.

If the economic situation worsened significantly further and Merkel saw a need for QE, she might then back Mario Draghi, the ECB head, in a decision to do that. We are probably not close to that for the time being. But if and when big decisions on the euro will have to be made, the AfD would not be a constraint on Germany’s policies.

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About Holger Schmieding

Holger Schmieding is chief economist at Berenberg Bank in London. [United Kingdom] Follow him @Berenberg_Econ

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