Germany: Merkel’s Last Play

Published on November 16, 2017

An ominous indication of the deteriorating dynamics in Berlin’s four-party coalition negotiations came in an outburst last night by Wilfried Kretschmann, the Prime Minister of Baden-Wuertemberg who leads a coalition government with the Christian Democrats, who decried the “sniping” by Christian Social Union officials, even asserting “these gentlemen do not want the talks to succeed.”

We think Kretschmann, one of the Green party’s leading “realo” leaders, is not that far from the truth.

*** We continue to believe the market is significantly underpricing German political risk (SGH 9/25/17, “Germany: A Weakened Merkel”), with the odds well above even the coalition talks are likely to fail as early as tomorrow or at any point through year-end. As there is almost no chance the Social Democrats will re-enter into a Grand Coalition with Merkel’s CDU/CSU, we suspect Merkel could then be forced from power, leading to either a fragile minority government led by the CDU’s Wolfgang Schaeuble, the former finance minister, or for German President Frank-Walter Steinmeier to call for immediate new elections. ***

A few points to frame the events in Berlin over the next 24 hours and into the weekend:

** The last phase of Germany’s four-party coalition “exploratory” talks are expected to go deep into tonight, with all four parties — the Christian Democrats, the Christian Social Union, the Greens, and the Free Democrats — set to hold board meetings tomorrow afternoon. They will then vote on whether there is enough of a consensus on their respective policy positions to proceed to the “formal” negotiations to form a new government with Merkel soon starting her fourth term as Chancellor.

** The coalition talks could still succeed, allowing for the next phase of formal talks to begin, despite deep party differences and diverging calculations. What’s more, Merkel herself has successfully navigated her way through previous political storms and has always dispensed with rivals and emerged on top, and more than any of the other party leaders, is prepared to compromise to get the government into power again. But in this case, most of the political dynamics are beyond Merkel’s control, which for the first time is putting her political fate in the hands of other party leaders maneuvering for position.

** In particular, CSU chairman Horst Seehofer is being challenged within his own party by his finance minister Markus Söder in the aftermath of the shock gains in Bavaria by the far right Alternative for Deutschland last September. To protect himself, Seehofer needs to bring home success, any success, in defending “Bavarian interests” which means he is unwilling to cede even the slightest of concessions by the CSU to the left-leaning Greens (or Merkel), especially on migration and to some degree on the environment. Whether it dents the AfD or not in next year’s Bavarian state elections is almost beside the point in the near term.

** FDP leader Christian Lindner is likewise adopting an equally hard line against the Greens, on European issues for instance, vowing that the FDP is willing to face new elections in trying to pressure the Greens into further concessions. His gamble is that unless public anger turns against them by overplaying his hand and being seen as the one who derailed the talks, the FDP will be better positioned in a new election by picking up center-ground CDU voters turning away from Merkel because of internal fighting.

** But most significantly, the sharply polarizing positions between the Greens and the CSU and FDP are mirrored to some extent by grumblings within the CDU, especially its more conservative factions who have long been critical of Merkel’s tendency to lean to the left in co-opting Green and Social Democrat issues. Tellingly, former finance minister Schaeuble has been silent throughout the last few contentious weeks of negotiations, which many in Berlin interpret as a precautionary measure to keep his options open should the talks collapse.

** For their part the Greens have so far adopted the most conciliatory stance in the negotiations, offering multiple concessions on almost all of their core environmental campaign promises, like abandoning the demand to close coal-fired power plants by 2030 or considering other options to reducing carbon pollution. But their leaders in the negotiations can only go so far from here, as they must put their concessions and any final deal to a vote on November 25 before the full party membership, which is overwhelming to the left of the leadership, which has in fact already been buffeted by heavy internal criticism.

** If the coalition talks do succeed and a Merkel-led government comes about, by all accounts it will be because of Green concessions. These will come at an internal party price, and it will be up to the leftist member of the Green party negotiating team, Juergen Trittin,  to sell the deal to the members. The word in Berlin is that his reward from Merkel would be the ministry of finance, instead of it going to the FDP’s Lindner.

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