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Guest ColumnistOpinion

Don’t be fooled by Merkel’s aura of invincibility

CDU election campaign posters with Angela Merkel are displayed in Berlin

By Paul Wallace

Unlike the nerve-jangling elections earlier this year in the Netherlands, France and Britain, Germany’s has been notably dull. The country that invented “Sturm und Drang is showing a distinct lack of storm and stress as Angela Merkel heads towards a fourth term as chancellor.

That seemingly inexorable outcome on September 24 has raised hopes that she will push through greater integration within the euro area, in partnership with French president Emmanuel Macron, while also championing the rules-based international order that America has forsaken under Donald Trump. But Merkel will find it hard to satisfy such expectations, since she will face new political constraints at home, while the basis for her authority, German economic strength, will come under increasing strain.

A string of polls suggests that the politics of Merkel’s fourth term will be tricky. The chancellor is a long way ahead but she is not doing as well as in the last election, in 2013. Recent findings show support for her centre-right CDU party (together with the CSU in Bavaria) at around 36 per cent, down from the 41.5 per cent she managed four years ago. Because of Germany’s electoral system, which broadly aligns the distribution of seats in the Bundestag with the parties’ share of the vote – while excluding those that fail to reach a 5 per cent voting threshold – she will once again have to form a coalition.

The most stable government would be another “grand coalition” with the centre-left SPD, her current partner, which is currently polling at around 22 per cent. That might appeal to the SPD leadership but many party members are opposed to playing second fiddle again, not least since this does not pay off at the polls. If Merkel cannot form a coalition with the SPD, she may have to form a coalition with not just one but two smaller parties, the FDP and the Greens. This combination would be a first in the Bundestag and it could prove fissile by bringing together the free-market FDP, Merkel’s junior partner in her second term of office between 2009 and 2013, with Germany’s environmentalist party, which has in the past allied itself with the SPD.

The coalition arithmetic could change if the election throws up surprise results for the smaller parties. But whatever alliance Merkel forms after probably protracted negotiations, it will face a disturbing new political phenomenon. Until now the Bundestag has been immune from the upsurge of populism in Europe. But the far-right AfD (Alternative for Germany) looks set to break through the 5 per cent threshold that held it at bay in 2013. Currently polling around 10 per cent, it has mutated from its euroskeptic origins into an anti-immigration party, capitalising upon concerns about the influx of asylum-seekers in 2015. Though riven by internal divisions and shunned by the other parties, the AfD will be able to use its presence in the Bundestag as a platform for its populist opposition to the chancellor’s policies.

The politics of Merkel’s fourth term may be more unfavourable than before, but that should be surmountable if the economy – her trump card in the election – remains buoyant. Growth prospects for this year and next year are good, continuing a robust performance in the chancellor’s last two terms. Manufacturers excel in exporting the high-quality engineering products in which Germany specialises. The current-account surplus is extraordinarily high at around 8 per cent of GDP. Helped by the humming economy and low interest rates on government debt, Germany boasts healthy public finances too, running a surplus of almost 1 per cent of GDP.

German economic and fiscal strength, so crucial in underpinning the euro zone during the crisis years of 2010-12, has come to be taken for granted. Yet under the shiny paint the engine looks less reliable for the longer journey ahead. Much of the economy does not match the prowess of German manufacturers. In particular Germany lags in business services, as a report from the OECD pointed out last year. Many professions are subject to restrictions that fetter competition. Germany is overbanked with too many small lenders and the banking sector has unhelpfully high levels of public ownership.

Moreover, the business model of German manufacturing is under threat. The diesel emissions scandal that began when Volkswagen admitted cheating US emissions tests has cast a shadow over the country’s premier industry and German carmakers’ big bet on the fuel now looks misplaced. They have to scramble to catch up with electric-powered models, whose time has come thanks both to technological advances and a wave of public-health measures led by cities to ban polluting vehicles. The self-driving revolution poses another challenge to German carmakers. Manufacturers fret that they may be on the wrong side of the digital divide, with Silicon Valley in effect grabbing the high value-added content of many products.

Germans are proud of their massive current-account surplus, yet the domestic counterpart is a lack of investment to absorb national savings. The government’s drive to balance the books has come at the cost of inadequate capital spending on the national infrastructure. Business investment has been subdued. Indeed, according to the OECD’s survey, German firms are behind those of other advanced countries in investing in the “knowledge-based capital”, such as software and management skills, that is increasingly important in spurring greater efficiency. That is one reason why productivity growth has been weak.

An underlying and profound weakness is that Germany’s demographics are especially unfavourable in economic terms. At almost 46, the median age of the population in 2015 was only just lower than Japan’s, the world’s oldest, according to UN data released in June. Although there was a baby boom from the mid-1950s through most of the 1960s, the birth rate fell below the replacement level (of 2.1 children per woman) at the start of the 1970s and has since been among the lowest in the world; indeed the current fertility rate of 1.5 is unusually high. These persistently low birth rates mean that there are fewer young people to replace the bulge of baby-boomers as they retire. Despite the recent upsurge in immigration the working-age population is set to fall, which will act as a persistent drag on growth by reducing the number of workers over the next couple of decades.

For the moment, Merkel still has the aura of invincibility. Yet in practice she will find the going tougher in her fourth term as political, economic and demographic vulnerabilities take their toll. That will limit her ability to meet the exaggerated expectations of what she can achieve both within Europe and on the wider international stage.

Paul Wallace is a London-based writer. A former European economics editor of The Economist, he is author of The Euro Experiment, published by Cambridge University Press.

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