Many pundits believe the German federal election on September 22 will prove a turning point in the sovereign debt crisis. We are less convinced. Barring a massive shock, Angela Merkel is set to be endorsed as Chancellor for another four years. If this is the case, Germany is unlikely to depart much from the playbook that has served it well in recent years and which may now be delivering positive results.
Admittedly, Mrs. Merkel’s Christian Democratic/Christian Social Union (CDU/CSU) will not be able to rule alone. But we don’t believe the euro-area policy picture will change much whether her coalition partners are the liberal Free Democratic Party (FDP) or the center-left Social Democratic Party (SPD).
There are two main reasons for this. First, so far as Europe is concerned, the differences between Germany’s mainstream parties are not large. Indeed, Mrs. Merkel already has to work closely with the SPD in the Bundesrat (the upper house), where the government is in a minority.
Secondly, it is not in Germany’s interests to change its approach. Since the beginning of the sovereign-debt crisis, Mrs. Merkel has adopted a strategy of supporting struggling debtor countries so long as they are willing to implement long-overdue reforms and take painful steps to stabilize their public finances.
This approach has not been without its problems, but it seems to be working, at least as far as the current crisis is concerned. Despite widespread talk of a euro-area break-up, the single currency is still intact. And recent data suggest that the euro area is starting to recover. This is not the time for big changes - especially for a conservative politician like Mrs. Merkel.
Moreover, anyone expecting big changes after the election is ignoring two other important points. First, Germany’s approach to the sovereign-debt crisis has softened over the last three years. Debtor nations have been given more time to complete their fiscal adjustments, while bailout loans have been shifted onto increasingly favorable terms. We expect Germany to make further concessions after the election, but this will continue to be on a quid-pro-quo basis.
Second, the real game-changer may already have taken place. In the summer of 2012, Mrs. Merkel publicly backed European Central Bank (ECB) President Mario Draghi’s intervention in the crisis. Moreover, she did this despite opposition from the Bundesbank - the former guardian of German monetary stability.
In the short term, this has helped stabilize the euro area and is allowing Germany and other countries to recover. Crucially, it has also meant that Mrs. Merkel’s re-election campaign has not been overshadowed by financial crises and bailouts.
But while Mrs. Merkel, with no small help from the ECB, has successfully neutered the sovereign-debt crisis as an election issue, her flexibility on European issues after the election will continue to be subject to two important constraints. Firstly, the public remains hostile to bailouts and, secondly, the Constitutional Court has set limits on Germany’s ability to assume the debts of other countries. These constraints rule out more radical forms of debt-mutualization or joint-borrowing, such as Eurobonds. So, contrary to some observers’ predictions, all the pointers suggest that we should expect business as usual after the election.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Darren Williams is Senior European Economist at AllianceBernstein.