Growth Wins at the German Ballot Box

While Angela Merkel’s junior coalition partner was pushed out of Parliament in Germany’s elections last Sunday, as predicted she and her Christian Democratic Union (CDU) won a third four-year term at the head of the country’s government.

CDU fell just short of an absolute majority, claiming 311 of the 630 seats in the German Bundestag, but it enjoyed one of its strongest showings, with 41.5 percent of the popular vote compared to 33.8 percent in 2009.

Since the Free Democrats—Merkel’s leading allies over the past four years—lost their place in parliament for the first time since World War II after failing to secure at least five percent of the vote, the CDU will be forced to form a new governing coalition. The most likely partner is the Social Democrats (SD), who had an uneasy alliance with Merkel and her party during her first term.

As I’ve written several times, I expect Merkel to shift towards more accommodative economic policies with Europe; the odds that the CDU will be forced to partner with the left-of-center SD solidifies that argument.

The SD has a history of backing Merkel’s policies, helping to pass aid packages crucial to the stabilization of the European economy. But the SD has an agenda of its own, campaigning on a platform of pension reforms, the introduction of a bank bailout scheme funded by the banks themselves and the introduction of a minimum wage.

The SD also favors the formation of a pan-European banking union to help reduce the possibility of a future banking crisis and a more stimulative tack to foster a strong return to growth in both Germany and the euro zone at large.

While none of those positions are necessarily antithetical to the CDU, they don’t enjoy a great deal of popular support within the party. But after getting relegated to more of a background player during its first coalition government with! Merkel and the CDU, the SDs are likely to extract a higher price for their support this time around. And with the rise of harder left- and right-leaning parties in the German parliament, the CDU will find it much more difficult to do an end run around the SD and pick up votes elsewhere if needed.

So the SD will have a great deal more leverage to pressure the CDU to give ground on its desire to speed the pace of action on euro zone decisions already made and adopt more expansionary policies across the region, while lessening the focus on acting only in what are perceived to be the best interests of Germany alone.

That would be a critical shift considering that Germany has the largest current account surplus in the world at more than 6 percent of gross domestic product, or about $250 billion. As a result, in years past much of that German savings was invested in the more peripheral euro zone economies. But that capital fled those more marginal regions with the onset of the European economic crisis, creating a double whammy on top of the austerity measures forced on many European nations.

For the Germans to begin earning a real return on their savings, it’s vital that the region as a whole returns to growth. For that to occur, the German government has to release its death grip on the country’s savings passbook by taking a more accommodative stance, a core SD principal.

That said, I don’t look for a radical shift in German economic policies. The German electorate has proven itself fairly conservative judging by the ballot box returns and doesn’t care for precipitous actions.

But the CDU is in a position where it either has to partner with the more known quantity of the SD or some of the more radical fringe parties that have been emerging in German politics, such as the Alternative for Germany Party which wants to exit the euro and change the way parliamentary seats are allocated.

Consequently, the CDU has little choice but to form a governi! ng coalit! ion with the emboldened SD, which guarantees at least a subtle shift towards more accommodative policies. Ultimately, that will be good for both the euro zone and its German core, which have always had a highly symbiotic relationship.