Berlin at the crossroads

The September election is poised to bring about a binary result for the political landscape. As you will have heard, the Social Democratic Party is positioning itself already. The establishment has been acting surprised this week that instead of party chief and vice chancellor Sigmar Gabriel it will be Martin Schulz, the former president of the European parliament, as the new leader of the comrades and the nominee for the chancellorship.

Only fools would be surprised though. This space had already hinted at such a scenario in a late November post, when Schulz announced his return to Berlin and domestic politics. Fact is that Angela Merkel didn’t rule in an almost absolute fashion on her own merit, it was rather the SPD and their weak leader who didn’t manage to build the appropriate counterweight.

It will be different this time. Schulz is a much more popular and outgoing politician and will likely turn into a true adversary of Merkel. He is also the kind of man who doesn’t compete to become the junior partner in a grand coalition, again. Schulz is out to beat Merkel, maybe not win the election but become number 1 by way of an appalling constellation we have described numerous times before – a Red/ Red/ Green coalition.

It would be disastrous if not the end of Germany as we know it. The rest of the eurozone would have a much easier time to pull such a new guard over the table than dealing with Wolfgang Schaeuble, the personification of a concrete wall. The welfare state would likely run the danger of getting out of control. And immigration issues would face an even softer approach than Merkel’s.

Sahra Wagenknecht, the leader of the Left Party, the other Red in that potential trio, has already let it be known that everybody in politics is grateful for Gabriel to retreat and leave the field to Schulz. She is implicitly making advances and signalling Schulz that she and her crew would be falling over their feet to contribute to such a sea change. The Greens one doesn’t even need to ask I gather.

The momentum is clearly building, and unless Merkel gets her act together real quick, it will end in tears. Complicating things is that she hasn’t got anything going for her, now and in coming months. Quite the contrary, elections elsewhere may set precedent cases for change. Germany will not mirror the popular surge, as the AfD will win but not win big enough, but their gain will hurt the CDU, and populism goes both ways, to the right and the left.

Then, Merkel remains stuck in the quagmire of her refugee policies. The German populace may have developed this affection for her as their chancellor, but the mistakes she made will never be forgiven entirely, and she will be paying a political price for them. Imagine Schulz and his advisors happen to come up with a few populist but intelligent ideas, while she sticks to her “Wir schaffen das” (we can do it) diction…

Also, her government’s prevailing economic course may blow up in her face going into the polls. The world has changed, and it has never really looked upon Germany’s surplus policies kindly. And now there is one Donald Trump who has Berlin in his crosshair and will soon wield the sword in a more pronounced manner. You can already sense there is no love lost between those two leaders.

There is no way out. The numbers aren’t lying. Germany’s Q3 current account surplus with the US was 14 billion Euros, and the past 4 quarters cumulatively clocked up 59 billion. These are absolute record numbers and 5 times as large as going into the financial crisis 10 years ago. Trump will no doubt put his finger on them, and you can already see Merkel being a deer in the headlight.

It is similar with the UK. Germany has been a champion exporting to Britain, and now it faces the uncertainly of that market to be detached from the EU. Apropos eurozone… If anybody believed the old fairytale that Germany has a free ticket offloading its exports on the rest of the union, as long as it vendor financed it, think again. The current account surplus with the eurozone peaked in 2007 and has since almost halved.

It looks like no one is coming to Germany’s rescue to perpetuate its holy grail of trade and other surpluses, the teutonic formula of success, at least in the eyes of the ruling CDU. The eurocrat Schulz will know how to turn this to his advantage. If it was up to the SPD, the brutal budget discipline would long be history and spending a lot more prominent in order to mitigate imbalances that have caused considerable grief on all sides.

Being typically German, as one would say, Merkel and Co may even make the next mistake in light of the pushback on austerity, on trade and on the country’s sacred surpluses, namely to think that Germany needs to tighten the belt even further and become even more competitive, something that will completely counteract reality. It will certainly not address the cause of the decline in net export within the currency union.

If Schulz was smart, he could display Merkel as Don Quixote riding against windmills. With the house of cards coming down in the eurozone and a little help from Trump he might pull it off and unseat the long-term darling of the Germans. The stars may be aligned for him, but they aren’t for Germany. The country is in danger of slipping from teutonic monetary and fiscal dogmatism into a liberal quagmire it may not come back from.
Happy Chinese New Year of the Rooster!