Date TimeNovember 19, 2017
VoiceMerkels 4th term in doubt as German coalition talks fail

Stability — whether it be economic, social, political or cultural — is a key term Germans use to define what they believe makes them, and their country, so different from the rest of the world.
The ensuing corollaries are predictability, dependability, responsibility, discipline and orderliness.
Many of those things, elevated to the level of national policy, have been invoked by Germans in their blistering criticism of the American administration — just because President Donald Trump told them that their freeloading on trade and defense was over. He warned that their systematic annual trade surpluses with the U.S. of $65 billion to $75 billion would no longer be tolerated; he also reminded the Germans that they had fallen far behind on their financial commitments as a member of the NATO military alliance.
The Germans reacted indignantly, and their media are still having a field day throwing abuse at the U.S. presidency. Meanwhile, Germany's current caretaker, Chancellor Angela Merkel, invited the Europeans to respond to an allegedly unpredictable and unreliable American partner by taking "our fate into our own hands."
The rest of Europe, starting with France, is taking a much more nuanced view of trans-Atlantic relations. That is especially the case now that Germany's political conditions have lost their signature stability and predictability.

Bavarians digging their hills
Germany's problem, at the moment, is caused by attempts to create a stable governing coalition. The block formed by the Christian Democrat Union (CDU) and the Bavarian Christian Social Union (CSU), the two "sister parties," called the Union, now commands only 246 parliamentary seats, far short of the 355 seats required for the majority in the lower house of the German Parliament. Hence the exploratory coalition talks with the Green Party and the Free Democratic Party (FDP).
But those talks apparently collapsed in the last day as the FDP walked away from the table.
The fraying unity within the Union is being glossed over, but the fact is that the CDU and CSU sisterly love has been rudely tested ever since CDU leader Merkel unilaterally decided on an open door immigration policy in 2015. The CSU's boss, Bavarian Minister President Horst Seehofer, has severely criticized that decision. He also remains opposed to many aspects of a much more restrictive immigration regime Merkel was forced to introduce over the last two years.
Still, Seehofer's conservative Bavarian constituency seems to believe that he was not strict enough. As a result, the Bavarians gave the CSU only 38 percent of the vote in last September elections, down from 47.7 percent in 2013 elections, marking the party's worst electoral showing on its home turf in the post-WWII period.
Seehofer, therefore, wants a rightward shift on immigration and security to fight a strong upsurge in Bavaria of the right-wing Alternative for Germany (AfD), which got 19.17 percent of that state's vote and 13 percent in the nationwide poll.
Bavarians are blaming Seehofer for all that. His job is on the line. If he yields any ground on Merkel's immigration policy he could lose the CSU leadership during the party's congress next month.
The fury is directed at the Greens, but there were also serious negotiating difficulties within the Union. The CSU, for example, took an uncompromising stand on the Green Party's liberal immigration platform. The CDU and CSU also rejected the Greens' proposals of very strict environmental regulations.
Immigration, security and, to a lesser extent, environmental problems are now seen as serious blemishes on Merkel's governance. They are thought to be largely responsible for the fact that, under Merkel leadership, the Union got only 32.9 percent of the popular vote in the last September elections, a sharp drop from 41.4 percent in 2013, and the worst election score since 1949.

The ECB controls the euro
It is no wonder, then, that a wide spectrum of German media looks at Merkel as a weakened leader, desperately clinging to power despite a clear message from a deeply disappointed electorate.
That is the general picture emerging from the failed attempts to form a stable coalition government.
The mandate should go back to German people for another round of electoral consultations. I believe that is an inevitable outcome, regardless of flimsy and ego-flattering temporary arrangements that might be cobbled up.
How much does all that matter for the rest of Europe and the world financial markets?
The short answer is: Mercifully, not much.
Germany's monetary policy is in the hands of the European Central Bank. On the fiscal side, the big issue is what to do with the German budget surplus of about 1 percent of GDP.
The strong economy and the full employment make generalized tax cuts unnecessary, but that does not preclude more spending on infrastructure and other public service areas. Those who would ask the former Finance Minister Wolfgang Schaeuble — now president of the lower house of the parliament and the architect of "die schwartze Null" budget balance — would probably hear that Germany should save the money for the rainy day and retire some public debt currently estimated at 74 percent of GDP.
The surplus on trade accounts is much larger; it is now running at an annual rate of $275 billion and is likely to end up this year somewhere between 7.5 and 8.0 percent of GDP. That's a big drag on world economy, and a serious problem for Germany's euro area partners.
As in the past, Germany will get away with that. The International Monetary Fund will look the other way, and the euro area partners will continue to suffer in silence while Germans think that those surpluses are their birthright.
Washington will make some noise, but it is not clear what it will do about its trade deficit with Germany running at an annual rate of $63 billion in the first nine months of the year.
Now, will the German search for a stable government disrupt economic relations within the EU?
No, not in the least. Germany is a huge economic beneficiary of Europe's single market and its monetary union. It, therefore, is not in Berlin's interest to obstruct the work of European institutions. Whatever the outcome of the current, or future, government coalition talks, Germany can always find an appropriate solution to be adequately represented at EU's decision-making levels.
Meanwhile, the EU's Commission will grind on, following the agenda, and tackling the tasks, set out by the European Council, a forum of the heads of state and government.

Investment thoughts
Germany's euro partners are being very discreet about Berlin's "machtkampf" (struggle for power), although one could have expected some of them to bubble with schadenfreude at the travails of their ever-ready lecturers and enforcers on matters of economic and political virtue.
That's good for the European unity. People will have to learn to live with German political conditions reminiscent of those in Europe's more turbulent southern areas.
On the economic front, the ECB, under the baton of maestro Mario Draghi, is firmly in charge of the euro area financial stability, and of the common currency's real purchasing power. As for Germany, its discretionary fiscal policy settings will have to remain in neutral until there is a stable governing coalition to manage national priorities.
Those bemoaning that Germany won't be driving Europe's deeper economic and political integration might wish to relax. A pause for thought could be very beneficial.
But those in Germany regretting that this will now give free hand to the young French President Emmanuel Macron to carry the torch of "European sovereignty" — whatever that means — are just demonstrating a worrying aspect of the French-German relationship.
Based on German numbers for the first seven months of this year, France takes a quarter of German exports to the euro area, and accounts for one-half of the German trade surplus with the monetary union. In spite of that, France is given such a condescending treatment.
If Washington is watching, that is one more example of Germany pocketing its trade bounties without any qualms.
The euro-denominated assets remain attractive portfolio choices.
Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.

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