As focus shifts to German coalition negotiations, who are the key players to watch?

After a surprisingly manic election night the focus in Germany now shifts to the tricky task of forming a government. As we noted yesterday, many options remain possible. Merkel looks unlikely to gain a majority on her own while the FDP and AfD are certainly out of the Bundestag.

This leaves a Grand Coalition, a CDU/CSU and Greens coalition or (as a very, very longshot) some form of SPD-Greens-Die Linke (Red-Red-Green) coalition or alliance which could still mathematically have a majority.

Little progress is expected before the end of the week, with the SPD holding a small party conference on Friday where it will determine its strategy for the negotiations. SPD Chancellor Candidate Peer Steinbrück has already said that the “ball is now in Merkel’s court”, suggesting he expects her to propose the terms of any Grand Coalition. Meanwhile, Greens leader Jürgen Trittin has said that, while open to negotiations over a coalition with Merkel, the chances of finding an agreement are “extremely limited”.

Who are the key players in the formation of the new government?

Angela Merkel (Chancellor – CDU/CSU): As Chancellor in her third term, Merkel will remain the key power player. Her slow and incremental approach will continue and set the tone for the whole government. Her term will be dominated by questions over her successor – for which there are few candidates. Rumours already abound that she may leave before the end of her term. She will need to identify and groom a successor, however, whether this will erode her own power base remains to be seen. Remains a key ally for Cameron and the key person he needs to convince for his reform agenda.

Wolfgang Schäuble (Finance Minister – CDU/CSU): Likely to remain Finance Minister, strong supporter of Merkel’s incremental approach to the eurozone crisis.

Peer Steinbrück (SPD Chancellor Candidate): Likely to lead the coalition negotiations for the SPD (although this could still change), but won’t take up any ministerial post in a grand coalition. Could well pay the price for the party’s poor electoral showing. 

Sigmar Gabriel (SPD Chairman): Likely to be Vice-Chancellor and take up ministerial post (either labour or defence) under a grand coalition. However, given the bad overall score for the SPD, the existing internal pressure on Gabriel might reach a tipping-point and leave him empty-handed. 

Frank-Walter Steinmeier (Leader of the Opposition in the Bundestag – SPD): Likely to become Foreign Minister under a grand coalition as in he was in 2005 - 2009. Had a reputation for undermining some of Merkel’s foreign policy goals in the previous coalition. Often seen as a Francophile and has previously suggested he believes the UK will leave the EU. Could hamper UK reform effort, although that said, much of the power on European decisions now lies in the Kanzleramt and Finance Ministry. Furthermore, the shift from current incumbent, Guido Westerwelle, may not be huge.

Thomas Oppermann (SPD): Likely to become Interior Minister given his expertise in this field.

Greens leadership: After the Greens slipped to 8.4% (compared to 10.7% in previous elections), a lot of internal movement is going on. The party’s Chief Whip, Volcker Beck, has already announced his resignation while the double party chairmanship, Claudia Roth and Cem Özdemir, offered their resignation this morning.

Both lead candidates, Katrin Göring-Eckar and Jürgen Trittin, seem to be dedicated to stay even though internal party pressure is increasing on the latter. Finally, the leader of the Green parliamentary group, Renate Künast, would need to be considered among the key players in a potential coalition with the CDU/CSU. What ministerial posts they could or would push for is unclear, but one would assume environmental and energy related posts would be top of the list

Open Europe predictions for the German election

Despite presenting a ubiquitous front on our blog, our team does often have varying views on the issues we cover. As on twitter, there has been a debate going on within the office about the ins and outs of the German elections - everything from "Veggie Day" to whether the anti-euro AfD will make it into the Bundestag. And, of course, what type of coalition will be formed.

We all agree it will be a close run thing. But below we lay out each of our analysts predictions. Feel free to stick your own in the comments! (Click to enlarge)

Interestingly, it's five to four thinking the AfD will just fall short of the threshold, reflecting what we agree can be a case of AfD being underestimated in the polls. But six to three in terms of backing for a 'Grand Coalition' - which, in aggregate, must be considered a bit of a revision in favour of a grand coalition from what we laid out in our pre-election briefing. There's also one rogue analyst predicting FDP won't get in at all...

The Coalition's mid-term review on Europe: Bland and blander

Yesterday saw the publication of the Coalition's 'mid-term review', the aim of which was to "take stock of progress in implementing the Coalition agreement" and to set out the government's objectives for the remainder of its period of office.

The Europe section of the review was arguably the blandest part of what was a very bland document overall. So hardly exciting. The government highlighted the "referendum lock" on future treaty changes, disentangling the UK from the eurozone bailouts, and establishing the single European patent as its "achievements" (the first and third are genuine achievements). Like all UK governments in recent decades, it also stressed the need to remove the burden of unnecessary regulation and to secure a tough EU budget settlement.

As ever, the differences within the parties on Europe - though you wonder if they aren't sometimes more perceived than real -  mean that the Government seems unable to set out a 'grand vision'. As the Sun noted in its leader today, 'Europe' remains the "elephant in the room". To be fair, the Labour party, which has the luxury of the purity of opposition, has also failed to set out where, exactly, it wants the UK in Europe.

In other words: we're all still waiting for Cameron's EU speech...

Could Europe be an unlikely area of consensus for the revamped Coalition 2.0?

Over on Liberal Democrat Voice's the 'Independent View', we argue that:

Following the bad blood within the coalition over the collapse of Lords reform and the constituency boundary review, there has been much speculation that the two parties will enact a policy ‘reset’ after conference season, with Oliver Letwin and Danny Alexander already reportedly working out the details. Most people looking for potential fresh common ground between Tories and Lib Dems would hardly place ‘Europe’ at the top of their list. However, while the parties are unlikely to ever see eye to eye on the EU, given political will, there are a number of areas of potential agreement.

For example, both parties already agree on the need to amend the Working Time Directive. However, in terms of immediate action and potential achievability, there is no better target than reforming the EU budget. While the UK and other member states struggle to balance their books, the EU budget has grown year on year despite the vast majority of spending going on policies at best irrelevant, and at worst outright damaging, in the fight to deliver the jobs and growth Europe so desperately needs. 

Around 40% of the budget still goes on the Common Agricultural Policy; mostly subsidies to farmers and landowners which act as an outright disincentive for modernisation given they are de-linked from any meaningful economic activity. It is difficult to think of a policy more offensive to liberal values than the CAP: market distorting, sustained by effective lobbying from vested interests, staggeringly wasteful and inefficient, and disproportionately harmful to the least well off in society via higher food prices. Moreover, despite the Commission’s rhetoric, the CAP’s ‘green’ credentials are poor. Slimming down and radically refocusing the CAP by explicitly tying it to environmental objectives such as biodiversity would not only be hugely efficient, it would add credibility to the coalition’s claim of being the ‘greenest government ever’.

Another area in need of overhaul is EU regional spending; the current structure involving all regions in all member states, irrespective of their relative wealth, is economically irrational. For this reason, spending should be limited to the least wealthy member states where it can have the biggest positive impact, an objective endorsed by Nick Clegg. This would save the UK around £4bn net over seven years which could be ploughed straight back into developing the UK’s least wealthy regions, helping the Lib Dems to achieve their long-standing ambition of ‘rebalancing’ the economy away from its over-reliance on London and the South-East.

These measures would require the coalition adopting a much tougher line in the on-going negotiations over the EU’s next long-term budget than it has done, or else risk the existing flawed spending patterns becoming locked in until 2020. While achieving these reforms will not be easy, if pitched correctly, they could command support all across Europe.

These measures would deliver a number of wins; saving UK taxpayers’ cash, soothing coalition tensions, and securing electoral popularity – Lib Dem members and voters are in tune with national opinion in wanting more national control over many policy areas currently significantly influenced by Brussels. Having shown that they can be ‘tough’ on the EU, Lib Dems would then have greater credibility when making the positive case for its continued involvement in other areas.

Greek elections unlikely to yield any answers

The Greek elections are almost upon us. Much of the attention (including ours) has been focused on the French election, possibly rightly given the potential impact on the Franco-German axis and the austerity approach to the eurozone crisis. The lack of attention may be down to Greece-fatigue following the intense start to the year with the Greek restructuring, or the fact that with a bailout and strict programme in place the room for flexibility with the new government is severely limited. That said, the Greek elections have the potential to be almost as important.

Despite the well documented rise of fringe parties and the strong talk from New Democracy (ND), a coalition between Pasok and ND looks to be the most likely outcome. Combined the parties may gain around 35% - 40% of the vote. The largest party (likely to be ND) gets an extra 50 seats under Greek electoral rules, meaning that the coalition would be the largest combined group in the Parliament and may just scrape a majority. This position will be aided by the fact that all the other parties are fairly disparate and unlikely to form any cohesive opposition.

However, even if this coalition is formed there numerous ways in which it could play out:

1)      Stable coalition – ND and Pasok manage to gain and hold a majority in the Parliament. They set about attempting to implement the EU/IMF bailout package. May be some talk of renegotiating elements of the package, particularly to boost growth. If anyone is to have success on this front it would be this coalition as it has at least some experience and knowledge of negotiating with EU/IMF.

Impact on the eurozone: This added stability would likely be positive for markets and the eurozone in the short term. Ultimately, it will not make much difference since Greek debt still looks unsustainable and implementing the necessary reforms will be a massive challenge on the ground even if they are pushed through parliament. There is less chance of external financing being cut off anytime soon, since the government will at least try to adhere to the programme.

2)      Coalition breaks up, new elections where ND wins a majority – The coalition fails to gain a full majority in Parliament (possibly due to Pasok defections after the deal is struck) or fails after a very short time due to lack of cohesion between parties (especially if ND leader Antonis Samaras feels he could gain a full majority in new elections). Elections delay implementation of EU/IMF package but once ND government comes into power the implementation continues, although calls for growth policies will grow louder.

Impact on the eurozone: Ultimately, depends on how long the coalition lasts and the policies which ND uses in the new election to gain a majority (potentially shift further right if there is growing disillusionment with the EU/IMF austerity).  ND unlikely to push for euro exit or full renegotiation of EU/IMF package so that adds certainty, but the inherent problems with the package (mentioned above and covered in detail here) still hold true. The turnover between elections could be important. Any delay in implementing the package will not go down well with the EU or IMF and could reduce its effectiveness even further.

3)      Coalition breaks up, new elections fail to deliver suitable replacement leading to an election cycle – Coalition breaks down as mentioned above, but this time the new elections fail to deliver a clear winner, possibly with an even greater move towards the far left and far right parties. This would likely trigger a series of unstable coalitions and probably more elections. Once this cycle has begun it will be hard to break, particularly with Greece’s economic situation seemingly only getting worse.  

Impact on the eurozone: This would be the worst of all outcomes. The EU/IMF package would fall by the wayside due to lack of willingness or a government to implement it. If a cycle of elections does take hold it could feed anti-euro sentiment, although anger has, for now, been largely directed at the austerity bailout rather than euro membership more generally. This would eventually result in funding being cut off and Greece probably having to exit the eurozone. This is unless such a threat galvanises the population to vote a single party supporting the euro into power.

Overall, a ND-Pasok coalition looks likely but it will probably be far from stable. It is definitely hard to see it serving a full term. The most likely outcomes (1 and 2 above) may deliver some short term certainty but problems loom large for Greece over the medium to long term. The EU/IMF package still looks unachievable for Greece and will not solve its debt sustainability problems, while there is surely a tipping point where the Greek population withdraws its support for the euro more. At the moment this is still some way off. These elections will certainly not deliver a definitive answer to long term issues in Greece and there is still a chance that an uncertain outcome could worsen Greece’s situation.

Coalition all over the place on the eurozone

Irony alert.

Ken Clarke - former UK Chancellor, now Justice Secretary in the Coalition - went on Newnsnight last night, taking a swipe at politicians in the eurozone and the US.

Clarke said :

"The main thing I take from this crisis is unfortunately the political leadership in the USA and large parts of Western Europe have been totally overwhelmed by the dimensions of the crisis, not able to cope...You have paralysis in Washington, and paralysis in large parts of Europe because they are incapable of agreeing and everybody is fighting short-term politics. I do not think the British government comes out of it too badly when you make the comparison."

Incapable of agreeing, eh?

In contrast, the Coalition has a coherent view of what the eurozone should do...not.

This is what Clarke (who once said, “The reality of the euro has exposed the absurdity of many anti-European scares while increasing the public thirst for information. Public opinion is already
changing […] as people can see the success of the new currency on the mainland"), told Newsnight:

"I think the euro will survive... What the eurozone needs is fiscal discipline, that's what the eurozone needs. It doesn't need the same level of tax, it doesn't need the same level of spending. Governments can decide that for themselves whether they are high tax, high spend, or low tax, low spend. But discipline, fiscal discipline, controlling of deficits... we agreed it when I was chancellor and the Germans led the way in breaking it."

It's hard to interpret this in any other way than that Clarke thinks that adherence to the original Stability & Growth pact will cut it. In other words, in terms of the institutional set-up, the status quo, with some tweaks is pretty much sufficient. Eurobonds - which would inevitably have to involve more German (or at least centralised) fiscal control as quid pro quo - are not necessary, for example ('same level of spending').

PA reports that Osborne "is understood to sympathise with Mr Clarke's sentiments", which confuses us. This morning, Osborne told a conference thus,

"Crucially, my European colleagues need to accept the remorseless logic of monetary union that leads from a single currency to greater fiscal integration."

And last month he wrote in the Telegraph,

"Solutions such as eurobonds now require serious consideration if investors are to be convinced about the long-term future of the currency."

We're sorry, but this is something quite different to what Clarke is calling for. Osborne clearly signals the need for more fiscal integration, including possibly eurobonds - which in fact could undermine fiscal discipline due moral hazard, but could potentially compensate for some economic divergences within the eurozone, depending on how you implement them.

On his part, Nick Clegg said last month

"Countries like the UK should not see ourselves as spectators, watching from the wings, triumphalist, complacent, as if Europe's economic woes are a eurozone problem, rather than a problem for all of us - as if it is enough to put your own house in order, but then stand by and let the neighbourhood crumble."

He went on to say that though it isn't his role to "predict",

"On the one hand, some people, including senior members of the previous UK government [hello Jack Straw], are predicting collapse and doing so with short-sighted relish, given it would do lasting damage to the UK economy. On the other hand, some people are now arguing that only complete fiscal union can work...I expect – as is usually the case – things will end up somewhere in between these extremes."

So, on eurozone survival:

Clarke: More fiscal discipline by sticking to existing rules
Osborne: Existing rules are not enough - greater fiscal integration is inevitable
Clegg: Somewhere between fiscal union and break-up (while UK cannot watch from the sidelines while the house burns, meaning participating in bailouts?)

What was that about being incapable of agreeing? Something tells us that the Coalition would not have fared much better had it been running German eurozone policy...

Of Pots, Kettles and Lib Dem MEPs

Before we get going, let us qualify the following post by saying that the Lib Dem MEPs have been doing a reasonably good job, particularly in areas such as financial regulation and transparency. Unfortunately, they seem to have dug themselves into a bit of a hole in this instance…

Lib Dem MEP Chris Davies moved to criticise Conservative MEPs today, for “refusing to back the government’s position” over the increase of the EU’s 2020 CO2 reduction target to 30%. The Conservative MEPs suggest that the target should not be increased from the current 20%, despite the Government's policy to support the increase. Davies went on to say that the Conservative MEPs were demonstrating “their real views about efforts to curb global warming”, and that "to be sure of success they need Conservative support. All indications are that they will not get it."

It’s all well and good to highlight disparities between the Government and the Conservative party at large, but, unfortunately, this time, the Lib Dems seem to have forgotten that they are also part of the Government…

As we’ve already noted, Lib Dem MEPs voted last month to scrap the UK’s rebate and in favour of an EU tax. Not only was this clearly against the Government’s position it was also expressly against their manifesto for the 2009 European elections.

Pot. Kettle. Black. No?

The political lesson from the Portuguese bail-out: don’t give up EU vetoes

Over on Conservative Home we argue that the main political lesson for the UK government from the Portuguese bail-out is don’t give up EU vetoes without thinking through all possible consquences. We argue:

"And here’s the thing, the reason why the UK is now required to underwrite a Portuguese bail-out to the tune of £3-4 bn (partly via the EU budget, the legality of which is dubious, party via the IMF, which is fair game) isn’t Alistair Darling, who signed the emergency bail-out deal in May last year, or George Osborne, who allegedly was consulted by Darling. The UK long ago gave up its veto over the part of the EU treaties – the now infamous article 122 – that can be used to commit Britain to financially assisting an EU country in trouble, if that country is hit by a “natural disaster” or “occurrences beyond its control.” Even if Darling, or Osborne for that matter, had objected to the emergency EU bail-out fund last May, they would probably have been outvoted as the decision was subject to majority voting (whether a UK Chancellor, even if he had had a veto, would have wanted to block the deal, given the enormous financial and political pressures at work is also open to debate).

The question then is, whose brilliant idea was it to give up the veto over article 122 – which has effectively become the financial equivalent to Nato’s Article 5 on mutual military assistance?"

To get the answer, read the full post.