EXCLUSIVE: First translation of draft German Grand Coalition agreement

We have seen a first draft of the German coalition government agreement (the final agreement is expected tomorrow), courtesy of Green politician Malte Spitz who published the draft on his blog late yesterday evening.

The German media has begun delving into the document while the English speaking press continues to lag behind.

The document contains some key insights about how the new government will view Europe and conduct its EU policy, below we pick out the most important parts:

Overall vision of the EU
The agreement stresses that German must become an official working language of the EU alongside French and English – not entirely surprising given that it was a CDU/CSU electoral pledge, but it highlights that Germany is slowly becoming more comfortable with its role in Europe.

There is also a strong emphasis on “subsidiarity” and that the EU must only act where action on other levels is not sufficient. It also highlights that Germany is keen to deepen ties with Poland and maintain the “unique” Franco-German partnership. This may not mean much, but it definitely isn't a nod to David Cameron.

In terms of democratic legitimacy, the agreement calls for a "strong role" for the European Parliament and "close involvement" of national parliaments  in the decision making process. It also calls for a standard minimum threshold for the allocation of seats under European elections and a "single European suffrage" to add to stable majorities at the European Parliament. The final point here is the call for a "stringent and efficient" set of Commissioners - possibly a hint towards reducing the number of Commissioners and focusing them on policy areas rather than allowing one for each member.  

Eurozone crisis
The agreement contains few details on the new government’s approach to the banking union and specifically the resolution funds – given that this is known to be a part of the negotiations it is surprising nothing has been included, maybe a sign that an agreement has been hard to come by.

The document also contains a rare admission from Germany that the causes of the crisis are "varied" and extend well beyond fiscal profligacy. Specifically to "competitiveness", "imbalances" and "design defects" in the EMU which led to problems in the financial markets.

As for the way out of the crisis - as we predicted - much more of the same can be expected:

“[The eurozone must] combine structural reforms to increase competitiveness, and a strict, sustained continuation of budget consolidation for increased competitiveness with future investment in growth that combines employment in socially-balanced way.”

Again as we pointed out in our pre-election briefing, the widely mooted ‘Reform Contracts’ are likely to be a key tool in enforcing these changes. In particular, the contracts will be democratically grounded and enforceable (although the exact mechanism for this is still unclear):

“We are committed to ensuring that the euro countries agree on democratically- legitimised binding and enforceable contractual reform agreements on the European level. [These reform contracts] will be directed to achieving the goals of competitiveness, sound and sustainable finances, growth and employment.”

Any form of debt pooling is strictly ruled out, as we predicted in our pre-election briefing:

“The principle that each Member State is liable for its own obligations must be upheld. Any form of pooling of sovereign debt would jeopardise the necessary national policies in each Member State. National budget responsibility and supranational, joint liability are not compatible.”

The new coalition will not rule out further bailouts and will consider them but “only as a last resort” when the “stability of the eurozone as a whole is at risk”. Importantly, the agreement reiterates that any use of the ESM, the eurozone bailout fund, needs “approval of the Bundestag”.

The City of London may also have some grounds for concern, given that the document hints at more action on financial sector regulation, saying:

 “The financial markets must be involved in the costs of the crisis, and must be guided back to their function as serving the Real-economy.”

Remember, this is only a draft. Nonetheless, the agreement looks to be very much as expected – no change of course on the eurozone, some mention of limiting EU power but a continued commitment to the EU and Europe. The draft however, remains vague on some key details. With important negotiations coming up on the eurozone banking union as well as in terms of the future of the EU, the new German government will have to flesh out its position significantly.

What are the next steps towards forming a coalition in Germany?

As we noted in this morning’s press summary the back and forth over different coalitions and their terms has begun in Germany. So far however all comments are likely strategic and no serious movement is to be expected in the next days. SPD chairman Sigmar Gabriel already stressed that the process will take "weeks and months".   

There are four key stages which have to take place in the negotiations and the likely timeline for them to be concluded is at least two months. It could well be longer if any of them is delayed since there is no official time limit.

Four stages

(1) ‘Sondierung’ (Informal talks between parties to establish whether there is enough consensus to start official coalition negotiations)
(2) Coalition negotiations
(3) Sign coalition contract
(4) Vote for Chancellor and launch of government

Preliminary schedule

27 September
SPD ‘small’ party convention (comprising SPD leadership + 200 members)
→ will decide whether party leadership gets green light to begin informal talks with CDU/CSU over a Grand coalition (Stage 1)

Early to Mid-October
‘Small’ party convention will reconvene
→ If the informal talks prove productive (stage 1) the party leadership will ask the small convention to give approval for the beginning of official negotiations (stage 2)
→ might defer this decision to the ‘big’ party conference (this would delay the schedule and could mean stage 2 does not begin until mid-November)

14-16 November
SPD ‘big’ party conference
→ If stage 1 & 2 successful, will decide whether coalition agreement will be adopted and thus give way to stage 3
→ Will also provide opportunity to decide issues such as party leadership positions & future ministerial positions

25 November
Bundestag will reconvene
→ Vote for next Chancellor and formal launch of new government

Clearly then, the minimum time for a Grand coalition to be formed and finalised is likely to be around two months. This could of course be different for a coalition with the Greens, although we would imagine not markedly so.

Merkel: Queen of the black forest

In case you wondered about just how crushing Merkel's victory in Sunday's German elections was, check this out.

Courtesy of Die Welt, these maps have been doing the rounds on twitter, showing the strongest party for each constituency in comparison to the previous two elections.

Merkel's black forest also gives an indication of how different the coalition negotiations will be this time around...

Cameron needs to begin putting specific reform ideas to Berlin

Our Director Mats Persson has an op-ed in today’s Telegraph. See below for the full text.

The old joke about the European Union was that it had two capitals: Brussels and Berlin. In the wake of the eurozone crisis, we can replace Brussels with Frankfurt – which is why Germany’s elections were watched with such keen interest in Downing Street.

David Cameron knows that his plan to negotiate a new deal between Britain and Europe depends almost entirely on Germany’s approval. So Angela Merkel’s crushing victory will have been a cause for both celebration and trepidation. The incumbent squashed all opposition, with her CDU/CSU party winning 41.5 per cent of the vote. This can only be seen as a massive endorsement of her approach to the eurozone crisis, trading German cash for others’ austerity.

Whatever the differences between the CDU and the Tories, Cameron retains a hugely powerful centre-Right counterpart with whom he can definitely do business. Merkel won’t pay any price to keep the UK in the EU, but she has dropped hints in public and private that she’s willing to grant concessions – including a reduction in the EU’s powers – so long as it doesn’t mean completely unpicking the founding treaties. The CSU, the CDU’s Bavarian sister party, is also an ally of Cameron’s, not least on issues such as rewriting EU rules about foreigners’ access to benefits.

In any coalition, the CDU and CSU will control the chancellery and finance ministry. This is where most of the de facto power over EU decisions now lies. Put simply: Merkelism will continue to dominate. Which is why, as one journalist told me yesterday, “Cameron should pop open the champagne.”

But it isn’t quite as simple as that. Merkel’s old partners, the free-market FDP, failed to make it into parliament. Ironically, it may have been the anti-euro Alternative fur Deutschland party which blocked them, by stealing the FDP’s votes. To form a new government, the chancellor will need a new partner, and it will have to be one of the Left-wing parties: either the Social Democrats (the SPD) or the Greens.

For Cameron, a centre-Right coalition would clearly have been a better deal. If the CDU and the Tories are distant cousins, the SPD belong to a completely different species – and the Greens even more so. The German Left is oriented towards Paris rather than London, and strongly in favour of tougher EU regulation, including the dreaded financial transaction tax. (With anti-banker sentiment still running high in Germany, this will remain a huge area of contention for years to come.)

The most likely outcome in Berlin is a grand coalition which hands the foreign ministry to the SPD. This is not a deal-breaker for Cameron’s plans. But it will certainly add a layer of complication, and may well take some issues off the negotiating table. For example, it’s hard to see how a German coalition and a socialist government in France will allow the UK to repatriate powers over employment law, even though this has been a Tory demand dating back to the early Nineties.

Still, with no German or French elections on the horizon – and the euro no longer fighting for survival – Cameron has what he has long needed: a window of opportunity. The tide is with him. Holland’s ruling party made clear only last week that it wants “less Brussels in several domains” including the return of “whole policy areas”, and has called for there to be a way to overturn, or at least challenge, the sillier rulings of the European Court of Justice. Even the Italian prime minister recently said that the return of EU powers “can be possible and it could be useful for us too”. “Everyone is now talking EU reform,” as one Brussels diplomat put it to me.

Most importantly, the European public are also in favour. As a recent Open Europe Berlin poll showed, German voters – by a margin of two to one – want their chancellor to back efforts by other EU leaders to decentralise powers. German voters’ trust in the European Parliament has plummeted from 52 per cent in 2007 to 33 per cent today, with a full 60 per cent wanting national parliaments to be able to block unwanted EU laws.

So how should Cameron play this? He certainly appreciates the importance of winning Merkel over to his cause: some estimates say that the number of visits by British ministers to Berlin has quadrupled over the past two years. Yet while the chancellor is instinctively sympathetic – particularly over the need to make the EU more competitive – the parliamentary backlash over Syria, as well as several other incidents, have left her wondering whether Cameron is really in control at home.

To assuage such concerns, Cameron needs not just to show that he is in charge of the agenda, but to begin putting specific reform ideas to Berlin to first slow and then reverse the drive to ever closer union. First, the core of the EU needs to be defined as the single market – not the euro. Giving the rest of Europe a veto over any eurozone proposals that touch on the single market could well win support in Berlin – and might prove more effective than a UK-specific veto over financial services.

Second, national parliaments must be the ultimate democratic check on Brussels’s decisions, while EU judges must be reined in. And third, there are several individual policy areas where Cameron should woo the Germans, from cutting the cost of Brussels to further liberalising the EU’s services market. With the German elections finally behind us, and Angela Merkel firmly in control, Britain will never have a better chance to get a better deal.

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

German election exit polls suggest plenty of scenarios still in play

The first exit polls are in and it looks to be a very close run election. However, not at the top but at the bottom.

ARD: CDU/CSU 42%, SPD 26%, Greens 8%, Die Linke 8.5%, FDP 4.7%, AfD 4.9%. 

ZDF: CDU/CSU 42.5%, SPD 26.5%, Greens 8.0%, Die Linke 8.5%, FDP 4.5%, AfD 4.8%.

Both polls suggest German Chancellor Angela Merkel CDU/CSU is the clear winner. Well above expected. However the results of the others mean there is plenty of scenarios still open. Below we run through them.

Merkel gains her own majority: Unbelievably this could happen. If both AfD and the FDP miss out, with other small parties garnering around 5% of the vote but not entering the Bundestag, Merkel’s party could gain its own majority with around 42%. Currently they look to be around three seats short of this but after having been barely considered during the campaign, this is now a very real scenario.

CDU/CSU and FDP coalition continues: Despite exit polls suggesting FDP has missed out, they are so close to the threshold that they could easily still make it in. If the FDP gets in and the AfD still misses out then the current governing coalition could be maintained.

Grand Coalition: If the FDP and AfD sneak in above the 5% threshold, as is possible, then a grand coalition would likely ensue, albeit with some very complex negotiations. This could also happen if both the FDP and AfD miss out but Merkel fails to garner enough votes for her own majority.

Plenty of scenarios still possible then, even one which was barely considered. Stay tuned as we update this blog and tweet @OpenEurope throughout the evening.

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...

Why Germany's 'boring' elections should still concern David Cameron

Our Nina Schick wrote this op-ed for today's City AM:

For a vote touted as decisive to the future of the Eurozone, the German election campaign – which reaches its climax on Sunday – has been lacklustre. With barely any talk of Europe, it’s been defined by domestic issues – from data protection, to rent control and taxation.

We Germans love a good debate on taxation. But while Germany’s main parties can differentiate on domestic policies, there is no substantial difference on the Eurozone. Long after the vote, and regardless of which coalition takes the helm in Berlin, Germany will remain a slow and deliberating player. No surprise, then, that commentators have dismissed the campaign as the “most boring” in recent memory.

Coalition dynamics may make the vote more interesting, however – and the UK, especially, should take heed. While most initially thought the likely outcome would be a continuation of the current centre-right coalition between Angela Merkel’s CDU/CSU and the liberal free market FDP, this may be changing. With as many as 30 per cent of voters undecided, this election will go down to the wire.

Recent polls show support for Merkel’s CDU/CSU dropping, while support for the centre-left Social Democrats (SPD) has risen. The latest figures predict that Merkel would not be able to form a parliamentary majority with the FDP. There is even a chance the FDP won’t make it past the 5 per cent threshold needed to win seats in the Bundestag. Last weekend, the party crashed out the Bavarian parliament after state elections.

We may see a backflip to the grand coalition of 2005: Merkel’s CDU/CSU and the SPD. While these dynamics won’t change much in the Eurozone, they are important to the UK.

It would be in Britain’s best interest to see a continuation of Merkel’s current coalition. She is a key ally for David Cameron, and will have a decisive influence in determining the success of his EU renegotiation strategy. Both Merkel and Cameron have a similar vision of the EU: based on free trade, reduced regulation, and improved competitiveness. It’s unlikely that anyone other than Merkel will become Chancellor. But if she enters a grand coalition with the SPD, things might not look so rosy for London.

First, in German politics, the foreign ministry usually goes to the junior coalition partner. While relations between Paris and Berlin have been strained since Francois Hollande took office (his spending rhetoric rubs Germans up the wrong way), a SPD foreign minister would be more likely to turn to Paris than London. Under the last grand coalition, the SPD’s foreign minister Frank Walter Steinmeier (also a contender for the post this time around) notably undermined some of Merkel’s foreign policy plans.

Second, the SPD is keen on further financial regulation. Only a few days ago, its parliamentary spokesman vowed that pushing forward delayed plans for a financial transactions tax would be a “high priority” for the SPD if they enter into a grand coalition. Not great news for the City of London.

In short, German coalition semantics may not mean much to the Eurozone – but they certainly will to the UK.

Germany's anti-euro party mobilises non-voters and FDP supporters

Three days ahead of the German election, Germany's anti-euro party, Alternative für Deutschland is polling at 5%, according to the latest INSA Poll.

If AfD actually wins 5% of the vote, it will enter the Bundestag. The poll  has caused a bit of a stir, as most commentators didn't think AfD would make it into parliament.

Now INSA head Hermann Binkert has broken down where the potential AfD voters come from for FAZ:

22% FDP

16% CDU

9% Linke

6% SPD

3% Greens

3% first-time voters

13% other parties

28% non-voters

- It's interesting that the largest share of the AfD vote comes from non-voters, so it has mobilised non-voters in a way that other parties have not been able to.

- The second largest share of the AfD vote comes from FDP supporters. The FDP haven't been doing too well in the polls (currently at 6%), so there is  the outside possibility that the AfD will make it into the Bundestag while the FDP won't.

Germany's anti euro party clashes with major pollster ahead of election

As we have noted in the past, it is possible that Germany’s anti-euro party, Alternative für Deutschland,  has a wider support base than polls suggest. 

Voters may still be embarrassed to admit support for AfD via telephone polling (popular in Germany), and because polls are weighted to include past vote recall, they are inherently biased in favour of the established parties.

Though polls usually put AfD  on about 2-3%, recent polls have put them as high as 4%: just one point short of the 5% threshold needed to enter the Bundestag.

And this issue has been stewing. Last month AfD leader Bernd Lucke claimed that employees of  the major German polling companies, Forsa and Allensbach,  had informed him that AfD was polling well above 5% in the pollsters' raw data, but that they were deliberately fudging AfD’s results.

Pretty sensational stuff if true.

But now the regional court in Cologne has slapped AfD on thewrist, ruling that it is not allowed to make such allegations against Forsa.

Forsa Chief Manfred Güllner (who has previously admitted that the AfD may do better than predicted by polls), called Lucke’s allegations “disgraceful,” adding that AfD hasn’t  “even come close to 5% -- let alone over.”

Güllner isn’t holding back his punches, saying of the Afd leader "I only call him liar Lucke...[he] is completely insane. We handle AfD just like every other party. What Mr Lucke is claming is utter rubbish, a complete conspiracy theory. None of our employees spoke to Mr Lucke, absolute nonsense.”

But with the federal election taking place in less than a week, we will soon know just how accurate the polls have been about AfD.

 

What do the Bavarian election results tell us about next week's general elections?

Yesterday’s Bavarian state elections saw a clear victory for the CSU, Merkel’s CDU sister party at the federal level, securing 47.7% of votes in the 180-seat state legislature. That translates into 101 seats for the conservatives, 10 more than needed to form a majority government.

Results of the Bavarian state elections

So what could that mean for next week’s general elections?

• Could the results provide a boost to the CDU/CSU and push them an absolute majority at the federal level? This is very unlikely given that the CDU/CSU haven't won an absolute majority at the federal level since 1957 whereas an outright majority for the Conservatives in Bavaria is rather the status quo (except for the previous coalition with the FDP, the CSU has enjoyed an absolute majority for 56 years). 

• Furthermore, both the CSU and the SPD gained percentage points compared to the previous elections. This result was basically in line with the large majority of pre-election polls. So it won’t necessarily give either party an edge for the next week’s general elections.

• The FDP lost 4.7% compared to previous state elections and, with overall result of 3.3%, missed the threshold to enter the Bavarian state parliament. This could be seen as a bad omen for next week's general election and may raise the chances of a grand coalition. That said, tactical voting (from CDU/CSU) voters is an important part of FDP support. This result could prompt an increase of such voting at the general election, as CDU/CSU voters fear an FDP failure and the move towards a grand coalition. FDP leader, Philipp Rösler, called its party’s result in the Bavaria elections “a wake-up call”. It could end up being exactly what the party needed to secure its entry to the Bundestag.

• It's also worth noting that the FDP has traditionally faired badly in Bavaria and rarely makes it into the parliament - the last election then was an exception, rather than the rule. Furthermore, the CSU feared losing an absolute majority so many supporters voted tactically at the previous election, at this one the majority was essentially assured.

• The usefulness of the Bavarian elections as a bellwether for the general elections should not be overestimated either - the CSU dominates, while the Free voters also have a strong support base but the Greens traditionally struggle. It's also worth keeping in mind that Alternative fur Deutschland did not run in the elections.

The general reading seems to have been that this is a bad sign for the current coalition government with the FDP struggling. That could well be true, but it may just end up being the sign that supporters of the current coalition needed to vote in a way which ensures extra FDP support. All still to play for then next week.

This is how Merkel could flunk the elections: enter the Far Left

Coalition politics combined with proportional representation and a fundamentally regionalised system can create the most fascinating potential outcomes – and do your head in. Like this: Merkel could still lose the German elections. Die Linke – the far-left party with a touch of DDR-nostalgia – could become the Kingmaker, paving way for a Social Democrat (SPD)-Green coalition.

This is how it could work:

The latest polls put the CDU/CSU at 41% and the SPD on 26% - with 59% of voters supporting Merkel as Chancellor compared to 30% who support the SPD’s Steinbrück. With the SPD and Greens still far off an absolute majority as a block, and with the FDP – Merkel’s current junior coalition partner polling at 5-6% ( the Bundestag threshold is 5%), it may seem as if Merkel has bagged it, either as part of a CDU/CSU-FDP coalition, or a CDU/CSU-SPD grand coalition.

However, this race isn’t over yet. If the FDP fails to make the 5% threshold, a lot can happen. The FDP could fail for two reasons: AfD could be nicking more votes from the FDP than expected, and ironically, the FDP scoring well in the Bavarian State elections on 15 September, could divert strategic CDU votes away from the FDP (voters who might vote strategically may have a false sense of confidence in FDP’s chances).

With the FDP out, the CDU/CSU is unlikely to get an absolute majority of Bundestag seats of its own, so it all becomes a matter of which constellation can reach a relative majority.

Enter Die Linke. The political divide between SPD-Greens and Die Linke is far too wide for them to actual joining forces in a coalition – in some SPD circles, Die Linke is, frankly, considered to be full of nutters. However, these parties do have one common interest: get rid of Merkel. So instead of SPD or Greens entering a very messy coalition arrangement with CDU/CSU (which no one wants, except the voters), they can strike a dirty deal with Die Linke whereby the former offer its passive support in the Bundestag on a policy-by-policy basis. A minority government with Die Linke’s blessing.

SPD/Greens would have to offer Die Linke something in return, of course, and the question if there’s any policy area where there’s sufficient overlap – or at least not outright conflict - between the parties manifestos for a deal to be struck. A new wealth tax perhaps? What’s clear is that Germany would take a quantum leap to the left.

What’s interesting is that though Die Linke leadership has previously hinted at this option being ruled out, the party never moved to rule it out completely. Die Linke head Bernd Riexinger said recently “If there is a majority against Merkel [after the elections], I will not exclude any option…only content will decide.” This is a clear invitation. However, we still hold this is as unlikely.

It would be interesting though to observe how Germany, governed by an SPD-Green coalition with Die Linke’s blessing, would continue its leadership role in the eurozone.

UPDATE: 6 September 2013

Speaking on the campaign trail yesterday, the SPD's Chancellor Candidate, Peer Steinbrück reiterated that "The SPD does not consider Die Linke appropriate as a coalition partner." It remains unclear, however, if  Steinbrück is rejecting cooperation with Die Linke until election night, or for the entire duration of the new government term.

Germany's anti-euro party may still yet make it into the Bundestag

Don’t think the German elections are a done deal – and, in particular, don’t rule out Germany’s anti-euro party, Alternative für Deutschland.

Though Merkel’s CDU/CSU is doing well the polls – as has been noted – her party could still flunk this one. German election surveys are notoriously  unreliable – and in the past, the polling figures for the CDU/CSU in particular, have tended to be higher than the actual election results. The central scenario for the new German government is still definitely a CDU/CSU-FDP coalition. However, a grand coalition of CDU/CSU-SPD is very much on the cards. If the FDP fails to get into the Bundestag, we could even be looking at a SPD-Green coalition – but that’s still unlikely.

The thing to remember is that the share needed to secure a majority in Bundestag isn’t the same as overall support in the polls, as the votes below the 5% threshold  parties need to win seats in the Bundestag will be dropped, while some seats are actually first past the post. So it’s not all that straightforward.

One interesting question, though: will Alternative für Deutschland shock Europe and make it into the Bundestag? A Forsa opinion poll for RTL/Stern today put the party on 4% .

This means we’re very close to a scenario where AfD is in and FDP is out. The assumption so far – including initially from us – was that AfD would struggle to get above 5%. Its window would instead be the European Parliament elections (without 5% threshold and possibly following a series of tough decisions in the Eurozone). However, we’re not confident of that any longer. Before the Italian elections, we predicted that Beppe Grillo’s (at least semi anti-euro) Five Star Movement would do better than many assumed. Deja Vu?

Possibly.

First, there are a huge number of swing voters swirling around Germany – over 30 per cent are undecided according to some polls, with one recent one even claiming 72 per cent. We literally have no idea where all these votes will go, but they could prove favourable for AfD. They could, of course, also go against the party.

Secondly, polls can easily underestimate the strength of  a new, protest party – as in the case of Grillo. Online polls tend to put AfD higher than polls conducted over the phone, suggesting that voters are still embarrassed to actually admit publicly, and to pollsters, that they'll vote AfD. German polls aren’t actually that great at predicting outcomes, for various reasons.

Now, AfD won’t do a Grillo  - who absolutely exploded onto the scene. However, a lot more sensational things have happened in politics than AfD landing a spot in the Bundestag.

We won’t call this one either way.

German election update: Lucke hits back

An interesting story caught our eye in today's Welt concerning next month's German elections. Bernd Lucke, the head of the anti-euro Alternative für Deutschland party (seemingly undaunted by a recent attempted assault on his person) has written a letter to German President Joachim Gauck asking for access to documents in which the German government has simulated different scenarios to save the euro, citing Germany's freedom of information laws. The move fits with the party's theme of "having courage for the truth" (Mut zur Wahrheit), which it accuses other German political parties of lacking.

This comes after the same request addressed to the Chancellery, Bundesbank and German banking supervisor Bafin was rejected on the basis that the information is held by the eurozone's network of central banks, and therefore falls outside the scope of German law. Lucke has criticised such "questionable" behaviour on the part of German officials, while noting that the Bundesbank's refusal to reveal the information shows that it is de facto supporting the German government when it should be a politically independent actor.

While we're not expecting the information to become public soon, the documents would certainly make for interesting reading as they would reveal how the German government assessed the costs of a breakup, and therefore whether its subsequent policies for dealing with the crisis have indeed been 'alternativlos' as Merkel has argued, or whether alternative policies were jettisoned due to the short-term political and/or economic implications.

Greece almost as worried about a third bailout as Germany...

As a follow up to our earlier post on the German reaction to the revelation of a third Greek bailout, we thought that it was also worth noting that there has been a fairly strong reaction in Greece as well.

As we suggested yesterday, the outrage over a third Greek bailout was unlikely to be confined to Germany, with the Greek themselves coming round to the cold realisation that this could mean many more years under tough bailout conditions. Many of the papers ran headlines expressing as much, with some including some rather ominous pictures of Schäuble…

“Schaueble is threatening us with new help.” (Sytakton, 21.08.13)

“Greece in German urns.” (Ta Nea, 21.08.13)

“Chains with new credit and saving programmes.” (Syriza, opposition party, 21.08.13)

How much more austerity Greece is willing and able to stomach will surely be a big factor in any discussion on future aid. The one saving grace may be that this bailout, whatever form it takes, is likely to be significantly smaller than the previous two, potentially allowing for more flexibility.

That said, as long as Greek debt continues to look inherently unsustainable any easing of conditions may be just a pipe dream. With both sides already expressing concerns over the project, expect another fiery set of negotiations towards the end of this year.

German parties scramble as third Greek bailout drops into the election campaign

The parties scramble on Greece in the election campaign

As we discussed yesterday, Germany has finally owned up to what everyone already knew – Greece needs more help. Not exactly ground breaking news some might say, but given that the German federal elections are 4 weeks away, the response in Germany has been frantic – providing a bit more insight into how each party views the eurozone crisis.

CDU
German Chancellor Angela Merkel said yesterday:

“I cannot say today what amount would possibly be needed…I cannot put forward a number, or confirm one. I don't know. One cannot know…We can only decide in the middle of next year." 

“I have to say I am a little surprised. Each Member of Parliament has all materials [relating to Greece.] And that, what [German Finance Minister Wolfgang] Schäuble said yesterday about Greece, everyone already knew that.”

Since Schäuble let the cat out of the bag a few days ago, the government, (via numerous politicians and spokespeople) has been tirelessly trying to display the comments as being in line with existing party policy. It has also tried to dispel the discussion altogether, suggesting no decision will be taken until mid-2014.

SPD
As expected in an election campaign, the opposition has jumped on the slip up. In an interview with Osnabrücker Zeitung, SPD Chancellor Candidate Peer Steinbrück said:

“I say clearly that saving Europe and the cohesion of the continent will cost something, also us Germans. It is time that Mrs Merkel tells that honestly to the people.”

In an interview with Handelsblatt, SPD Chairman Sigmar Gabriel said:

“[This] is the difference between the Chancellor and the SPD. Mrs Merkel says Germany will not go into a debt-union. In reality, the Chancellor has already long-organised such debt union secretly via the ECB. Mr Draghi has taken over state financing in the crisis states. But even before the election, the bill is going to arrive, in that Greece will guaranteed apply for another debt haircut.”

Former German Chancellor Gerhard Schröder also made his first foray into the election, telling a party rally:

“It is a big lie that Germany will not have to pay for Europe.”

For all the SPD's attempts to push the CDU into admitting that the eurozone will need further aid, it still isn’t entirely clear what the SPD sees as the solution to the eurozone crisis. This has hampered its attempts to take advantage of the situation. It’s also telling that interventions by SPD party 'big beasts' seem to make Chancellor candidate Steinbrück look timid and uninspiring -- rather than helping him.

CSU
The Bavarian sister party of the CDU has been notoriously pessimistic over the eurozone crisis and is, expectedly, none too happy about the timing and the substance of the admission that Greece needs more aid.

CSU leader and President of Barvaria, Horst Seehofer said that a new aid package for Greece "is not in question," and that he is "not very happy," with the current discussion. Meanwhile, Bavarian Finance Minister Markus Soeder warned that:

“It was completely wrong to announce a third programme [for Greece] now.”

ECB
The ECB has offered veiled support to the German government. ECB Executive Board member Jörg Asmussen, who was visiting Athens yesterday, said that the plan remained to assess Greece’s situation once it registers an annual primary budget surplus -- likely at the end of this year.

Meanwhile, Bundesbank President Jens Weidmann commented that, “Nobody here [in Germany] longs for the D-Mark…We are fighting for a stable euro,” playing down fears this could revive talk of a eurozone break up.

Other parties have weighed in as well, with Alternative für Deutschland and Die Linke slamming the prospect of any further bailouts as expected. This incident could potentially help increase their share of the vote, although it may well come at the expense of the junior coalition partner, the FDP, which has been fairly quiet throughout this episode – that of course could make creating a governing coalition a bit trickier.

Despite the CDU's attempts then, this issue seems here to stay, although it is unlikely to have a significant bearing on the outcome of the election.

That said, it doesn't paint a rosy picture for the German approach to the eurozone crisis after the election. Those expecting huge change are likely to be dissapointed. Another bailout simply suggests more of the same. Meanwhile, all parties seem short of any real policies for how to change the current approach and/or find a real solution to the eurozone's economic woes.

Open Europe Berlin interviews Prof. Bernd Lucke, leader of Germany's anti-euro party AfD

Our German-based partner organisation Open Europe Berlin has published on its blog an exclusive interview with Professor Bernd Lucke - founder and leader of Germany's new anti-euro party Alternative für Deutschland (AfD). We have translated some of the most interesting bits.

On the topic of design flaws in the European Monetary Union (EMU)...

Bernd Lucke (BL): The root of all evil is, in my assessment, the fact that the European Treaties did not provide, and do not provide until today, for the possibility to withdraw from the eurozone...Since leaving [the euro] as a last resort was excluded from the outset, the possibility of exerting political pressure on member states was also limited.

[…]

Despite non-sustainable economic development in some countries, the financial markets obviously did not pick up on the large differences [between eurozone countries], which affected the risk of credit default. In turn, the low interest rates 'funded' these developments.  Actually, the alarm bells should have been ringing in view of the different developments in country-specific inflation rates, unit labour costs and trade balances. Also, the housing bubbles in Ireland or Spain should have been recognised and counteracted upon by politicians. However, warning systems were not available. It was revealed how ill-conceived the introduction of the euro was, under all aspects.

On the role of the ECB in the crisis...

BL: The ECB is not directly to blame because it was simply a part of the poorly constructed euro system...In the time before the crisis, the ECB could have been blamed at most for not pointing out the dangers associated with different inflation rates in the euro countries...Just a note: an independent central bank is good. But a central bank – like the ECB – that is no longer subject to state or democratic control and has switched to self-preservation mode is extremely dangerous.

On using tools such as the ESM and OMT to stabilise the eurozone...

BL: The ESM is ultimately a giant institutionalised eurobond, and therefore a form of debt mutualisation...What we want as AfD is...the return to the Maastricht criteria, and in particular the re-introduction and strict compliance with the no-bailout clause. No country shall be liable for the debts of other countries...Countries should and would go bankrupt, which would reduce the partly unbearable debt levels.

On how AfD sees a eurozone break-up...

BL: As an ‘immediate measure’, we demand the consequent compliance with the [existing] rules of the European Treaties as well as adding a euro-exit clause to the rules. If necessary, we want to force this right to exit by blocking future ESM loans with a German veto. Without further assistance loans, the crisis countries would decide that it is in their own interests to exit the monetary union. This should happen in an orderly and gradual [manner]. On the legal side, the European treaties need to be changed. We have parliaments and governments for that. And Germany has enough weight to push this through.

Steinbrück envisages a Europe led by Franco-German-Polish axis (Hello Cameron!)

Peer Steinbruck laid out his foreign policy in a talk at Berlin's Free University

Peer Steinbrück , leader of Germany’s centre-left SPD Party, and Merkel’s main opposition in September’s elections, laid out his foreign policy in a speech yesterday. It could have been a bit of ‘a non-event’. Germany’s Europe policy can hardly be expected to change in terms of substance, regardless of whether or not Steinbrück seizes the chancellery from Merkel come September. 

Although Steinbrück is critical of elements of Merkel’s vision for Europe, when it comes to the nitty-gritty of substance he mostly agrees. This can be put down to the fact that the traditional conservatism of the German public is more deeply rooted than its occasional impetus for grand reforms.

Against this background, we were expecting a lot of rhetoric, but no grand revelations. But then Steinbrück said something interesting.

Discussing Europe’s role in the world, he called for a Franco-German-Polish axis to shape its future. “This triad of Germany, France and Poland must take the initiative for a new beginning of European foreign and security policy,” said Steinbrück.

The first point to make here is that while the Franco-German alliance in European affairs is nothing new (strained though that partnership may be at the moment) the allusion to Poland as European leader on the world stage is. (And is one that will please a certain Polish Foreign Minister.)

However, the most interesting part of Steinbrück’s speech was the country he did not mention when discussing Europe’s role in the world: the UK.

Whilst Angela Merkel has gone out of her way to point out the importance of the UK playing a leading role in Europe, Steinbrück said the future lies in a Berlin-Paris-Warsaw axis. A signal to London and David Cameron as the Conservative seek new EU membership terms? Possibly.

As we’ve argued before, if Steinbrück became Germany’s next chancellor, the general thrust of Germany’s eurozone politics will likely remain. That’s not big news. The real significance of a centre-left German coalition after the September election for the future of Europe may instead be Berlin being far less interested in striking a new Anglo-German bargain.

We dare to guess that Number 10 wasn’t entirely happy about Steinbrück’s remarks.

Splits in Germany (and beyond) over banking union?

It’s been a week of 'splits' over Europe and it looks like another one may be emerging – although this time in Germany.

German Finance Minister Wolfgang Schäuble had an article in the FT arguing:

"While today’s EU treaties provide adequate foundation for the new supervisor and for a single resolution mechanism, they do not suffice to anchor beyond doubt a new and strong central resolution authority.

We should not make promises we cannot keep. The overly optimistic predictions about a single supervisor starting work as early as January 2013 cost the EU credibility.

A two-step approach could start with a resolution mechanism based on a network of national authorities as soon as the new supervisor is operational, the resolution directive has been adopted and the Basel III capital requirements are in place.

A banking union of sorts can thus be had without revising the treaties, including a single supervisor; harmonised rules on capital requirements, resolution and deposit guarantees; a resolution mechanism based on effective co-ordination between national authorities; and effective fiscal backstops, also including the European Stability Mechanism as last resort."

Essentially, pointing out that a full centralised banking union is some time away, post EU treaty change. This potentially has implications for the UK, as much of Schäuble's solution, with the exception of the common eurozone supervision, would apply to all 27 members - the question for non-eurozone countries, including the UK, is how they will be affected by the 'second stage' of his solution. On the other hand, treaty change, as we've noted before would potentially enable the UK to put forward its own amendments.

However, German ECB Executive Board Member Jörg Asmussen espoused a different view in comments to the German press this afternoon:

"It is the aim [of the banking union] to make the Eurozone more robust against banking crises with an orderly, cross-border resolution of systemically relevant banks without leaving the burden on the taxpayer or the central bank."

"We think this is best ensured by a common resolution regime, a joint resolution fund that is financed by banks' contributions and a common resolution scheme…The entire tool kit should be available along with the Single Supervisory Mechanism."

So, much stronger on the need for a clear centralised authority as soon as possible, preferably when the ECB takes on its supervisory role at the start of next year. This also seems to imply then that such a move could be done without changing the EU treaties.

To be honest this is not an entirely new position, it is something other members of the ECB have previously called for. Nevertheless, it represents a fairly significant split between two leading political voices in Germany over what is now the key policy for reforming the eurozone.

It's also worth noting that at a press conference earlier today the Spanish and Portuguese leaders both put forward a similar argument to that of Asmussen on the need for an immediate 'full' banking union. Meanwhile, Eurogroup Head Jeroen Dijsselbloem said that the issue of treaty change could be dealt with "later on" but admitted that "understandable questions" were being asked on this front.

We, as with all those following the crisis, wait with bated breath for German Chancellor Angela Merkel to declare which side she comes down on. So far she has managed to dodge taking any big eurozone decisions ahead September's election in Germany, but with key discussion on banking union coming up next month its not clear whether she can continue to do so on this one.

When ideology meets economic reality (Part III): Opposition to the FTT grows at the heart of Europe

As we noted recently with the exclusive release of  internal documents on the Financial Transaction Tax (FTT), even amongst those who are championing the proposal, there are a huge number of concerns. Well, those concerns are growing by the week, it seems. The last few days have seen several new interventions. 

First, there is a report from the Deutscher Aktieninstitute (DAI), an organisation representing German listed companies and investors, which warns that the FTT will cost German companies up to €1.5 billion per year. Blue-chip companies, including Siemens and Bayer, say they will face tens of millions of euros of additional cost from the tax due transactions they make to hedge currency and other risks.

What makes this intervention to significant is that we're talking wholesome, exporting German businesses - in the German public mind the very opposite to ‘speculative’ finance. As DAI chief-executive Christine Bortenlaenger put it, the tax is “a direct strike against the export-oriented German economy”.

This comes not long after the important intervention by Bundesbank President Jens Weidmann where he warned, as we did a few days before, that the FTT could impact monetary policy. With the German elections only a few months away, these concerns will be hard to dismiss.

Secondly, the Dutch Central Bank has issued a warning that the tax will cost the Netherlands a minimum of €500m, half of which will be paid by its large pension fund sector. This is all despite the country not taking part in the FTT directly. Dutch Finance Minister Jeroen Dijsselbloem hinted that the country is looking for a change in the way that the tax is structured so that it does not impact those not directly taking part.

Lastly, Financial News notes that MEPs – who have generally been the most stringent defenders of the tax – may be changing their minds somewhat. Over 100 amendments have been submitted to the current FTT proposal in the European Parliament. Changes include exemptions for pension funds and repo markets as well as calls for a more extensive cost benefit analysis of the impact of the tax  (though the EP doesn't have a binding vote on the FTT, it's still politically signifcant).

This cacophony of voices are strengthened by the fact that many of the concerns raised fall on the same points again and again – the impact on repo markets, the cost to pension funds, the knock on costs for retail borrowers and the reduction in lending to the real economy.

As we have long expected, there seems to be a growing feeling that the FTT will need to be watered down or altered in places if it is to come into force and not have a huge negative impact. The populist rhetoric of the tax seems to be finally butting up against the economic and financial realities which many long warned about.