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What the Bundestag election, Scholz and extra imply for the EU


Chancellor Angela Merkel (CDU) should leave politics.

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LONDON – As Germany prepares for a revision of its political status quo, analysts examine the impact the next government could have on the European Union.

Europe’s largest economy voted for a decisive vote on a new Chancellor on Sunday after Angela Merkel’s 16-year term in office.

According to preliminary results, the Socialist Party SPD narrowly won the elections with 25.7% of the vote. She is now trying to form a coalition government with the Greens and the liberal FDP. Merkel’s conservative alliance of CDU and CSU, which dominated German politics for decades, recorded the worst election result since the Second World War with 24.1% of the vote.

The SPD chancellor candidate Olaf Scholz, the country’s current finance minister and vice-chancellor, now appears to be in pole position as the next German head of state. Although it is not yet decided and tough coalition talks could ultimately fail.

“If Olaf Scholz becomes chancellor, he will be in a very good position because he has at least the experience of a finance minister,” Daniela Schwarzer, managing director of the Open Society Foundations, told CNBC on Monday about Scholz’s relationship with Europe.

Nevertheless, Schwarzer emphasized that Scholz was far less experienced than Merkel, who had played a fundamental role in European politics for decades.

“We could see a few months in particular – also in light of the French elections next spring – when things may be less smooth than normal,” she added.

As one of the founding states of the EU, Germany has long had a certain weight in European politics. During her time as Chancellor, Merkel helped shape the bloc’s response to the global financial crisis, the national debt crisis, the migration crisis and, most recently, the coronavirus pandemic.

Beyond the leadership style, there are unanswered questions about what the new German Chancellor will mean for a deeper integration of the 19 euro economies.

“While the mood music is a little more positive about some things that the EU wants, I think that the decision-making ability of the German Chancellor is quite limited,” says Robin Bew, managing director of The Economist Intelligence Unit, told the “Squawk Box Europe” on Monday from CNBC.

This is because, once the coalition is formed, it is likely to be a little more focused on EU integration than it has been in the past. However, he stressed that a tripartite coalition would also be more difficult to handle given the wider range of opinions.

“I don’t think you will see any particularly strong lead,” added Bew.

European issues

There are a number of issues that the next German government in Europe will have to grapple with.

One of the main projects at the eurozone level is the completion of the so-called banking union – which transfers the powers of the national banking authorities to pan-European institutions. It was only introduced slowly in the wake of the debt crisis, but Germany has shown itself to be particularly cautious about this idea. Many Germans reject the project because they fear that they will have to pay high bills in order to financially support less conservative euro countries.

A view of EU and German flags above the Reichstag building, the seat of the German Bundestag.

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The euro zone is also set to update its debt and fiscal rules in 2022 – this is because the rules have been broken several times, with various nations reporting a debt ratio of over 60% of GDP, for example, and deviations are expected to continue.

It is unclear whether Germany, known for its restrictive fiscal policy across the board, will support changes to the debt ceiling in particular.

In addition, in July 2020, the EU decided to jointly raise funds from public markets to fund the region’s recovery from the pandemic. The so-called Recovery Fund has been proposed as a one-off measure to reassure financially conservative nations like the Netherlands, but some experts wonder if the EU could make it a permanent instrument – something that would require the support of the new German, including Chancellor.

Scholz of the SPD has argued that Europe’s fiscal rules are already flexible enough as they allowed countries to spend more when the pandemic broke out. He also dodged questions about the future replenishment of the EU debt, saying this was not a debate on the table.

Meanwhile, the FDP, which is likely to be included in the next German coalition, “With regard to a deeper integration of the euro area, it has become more eurosceptic,” said analysts of the consulting firm Eurasia in a statement on Monday.

“A dramatic softening of the German attitude towards the EU’s debt and fiscal rules is therefore unlikely, so that the Recovery Fund will become an integral part of the EU’s fiscal architecture.”

Another issue in Europe is ambitious efforts to become climate neutral by 2050. To achieve this, the European legislator is discussing a specific plan to reduce greenhouse gas emissions by at least 55% by 2030. Germany, with its prominent automotive sector, will play a key role here if the green ambitions are to be fulfilled.

Eurasia described Scholz of the SPD as a pragmatist on this front and said he would be “open to using leeway to finance Germany’s transition to net zero”.

The President of the European Parliament, David Sassoli, was one of the very few politicians in Europe to comment on the result of the vote. He congratulated Scholz on his victory and said: “After this historic crisis no time must be lost: Europe needs a strong and reliable partner in Berlin to continue our joint work for a social and green upswing.”