Is a New Crisis Brewing in Germany and Europe?

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Nov 21, 2017 12:19:50 PM

and tagged In the News

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Germany and EuropeMany of us were under the assumption that we could go into the holiday season with Europe pretty much checked off the risk list. The economic news is good and getting better, and the major elections that have caused so much angst have passed. Not so fast, bub.

Uncertainty in Germany

The German election caused some concern in late September, as no party had a majority after a disappointing performance by Angela Merkel’s Christian Democrats and allied parties. Since then, though, it seemed that another coalition government could be negotiated (albeit with more back and forth than usual) and that everything would go on as before. The surprisingly strong vote for the nationalist Alternative for Germany (AfD) party could therefore be disregarded, as Ms. Merkel would keep running the show. Not so fast, bub.

In recent days, though, we got the news that the coalition talks had collapsed. As a result, Germany now faces a choice between a minority government—likely to be weak and hobbled by the need to put together alliances on every policy initiative—and a new set of elections. This has pushed all of the worries we thought we had set aside back to center stage.

Ms. Merkel has made her preference, for new elections, clear. Other political actors, however, have made their concerns about new elections equally clear. The result is that we don’t know the next steps forward, and we likely won’t for some time.

What’s different this time?

This kind of political uncertainty is new—and unprecedented—for postwar Germany. Broadly, there have been two major parties and a handful of minor ones. Between them, they have governed the country with policies that always fit within a broad consensus: sometimes on the left, sometimes on the right, but always not too far from the center. The fact that no party got a majority in the last election has happened before, many times. That’s not new. But the fact that a coalition could not be cobbled together, that the differences between the parties were so great that they could not be bridged, is. There is no longer enough consensus at the center of German politics to bring a majority together, and that is the problem worrying everyone.

You can see why Ms. Merkel wants new elections, as the present party mix simply can’t reach agreement. Why not try again? You can also see why others are worried, as there is no reason to believe the results of the new elections would yield more of a consensus than there is right now, and things might well end up even more fractured.

Why this is scary

For readers in the U.S. and many other countries, this may sound pretty familiar. We are all going through it in one way or another. For it to be happening in famously orderly Germany, however, is scary for multiple reasons. First, it represents a break with the postwar political order there, and no one knows what happens next. Second is Germany’s history itself. In the past, political breakdowns there have had very bad results for Europe as a whole. Third, Germany, along with France, has been the linchpin of the European Union project. If Germany turns inward, there is a real question as to whether France can lead Europe by itself.

This is why people are worried—and are right to be so. That said, other countries have handled and are handling this. So, the idea that somehow this presages the end is simply silly. We should not make more of this than it is. The likelihood is that, once again, Germany will find its way to consensus.

Also helping matters is that the European and German economies continue to strengthen. If you are going to have a political crisis, it helps a lot if you don’t have to worry about the economy—and Germany does not. This also will help bring consensus back, as the ability of the different parties to cut deals will be much easier in a growing economy.

Is this a crisis?

No, we are well away from a crisis. Could it become one? Yes, it could. But before then, we would have multiple indications that things were getting worse and would have time to react.

So, while this is something to watch, it is not something to worry about. It may become that, but probably not. If it does? We will have plenty of warning.

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