While a renewed four-year coalition of Germany’s two biggest parties suggests continuity, global challenges are accelerating and the next government -- possibly Merkel’s last -- may be more fractious than the previous one. Here’s a look at some of the issues in play.
Trump’s tariffs on steel and aluminum imports threaten to hit hard in Germany, Europe’s biggest exporter and a frequent target of criticism for its trade surplus. By putting the European auto industry into his sights , the U.S. president is broadening his attack on German manufacturing. Merkel has turned to China and Japan as free-trade allies, a push that may intensify. The chancellery in Berlin says Merkel has repeatedly made her trade stance clear to Trump and won’t shy away from backing European Union retaliation.
Merkel views China’s expanding economic power as one of the challenges of the century and her chief concern on the world stage, according to a person familiar with her thinking who asked not to be identified. Under the coalition pact, Merkel plans to turn Germany’s stodgy Economy Ministry into a platform for keeping tabs on Chinese investment, exemplified by billionaire Li Shufu’s $9 billion stake in Mercedes-Benz maker Daimler AG.
China poses a “huge challenge” to German industry, Merkel said in February, setting the tone for a policy focus that the Social Democrats are likely to share. German business is pressing Merkel to protect national interests. “While the U.S. provokes a trade war and China challenges our industrial leadership, we’ve been engaged in superfluous navel-gazing,” Thilo Brodtmann, head of the VDMA machinery lobby, said in a statement Sunday.
Merkel’s embrace of Macron, the youthful French president, masks differences over how to strengthen the euro area, including through proposed risk-sharing on banks. German red lines probably won’t change fundamentally, even as the Social Democrats take over the Finance Ministry in Berlin. “Progress with banking union will be an important step,” Clemens Fuest, head of the Munich-based Ifo economic institute said last week. “The art will be to accommodate France while setting structural conditions for sustainable growth.” Progress also depends on bridging differences between the SPD and Merkel’s Christian Democratic-led bloc.
The U.K.’s exit from the European Union has been mostly below the radar in Berlin since the inconclusive German election in September. With Merkel back at the helm and the clock ticking louder on Brexit, that may change. The chancellor has opened the door to giving Britain a unique, tailor-made trade deal, saying the EU shouldn’t get hung on past models.
Economy vs. Politics
Merkel could hardly wish for a stronger economic backdrop: Growth is the fastest in seven years, the jobless rate is at a record low of 5.4 percent, and a budget surplus of 1.2 percent of economic output means the coalition partners can spend. Pro-market critics say plans to gird Germany for the future, such as broadband expansion and increased research funding, fall short. Also unresolved are the threat of city driving bans for over-polluting diesel cars and a planned phase-out of coal power stations.
While Merkel’s deal with the Social Democrats signals that the political center is holding, the far-right Alternative for Germany will be the biggest opposition party in parliament. It’s a novelty for post-World War II Germany that reflects a shifting political landscape even as Merkel wins a reprieve.
“The seemingly eternal grand coalition could experience some road bumps here and there, given that Merkel will be on her way out and the SPD’s existential question has only been delayed,” Carsten Nickel, Brussels-based analyst at Teneo Intelligence, said by email. For now, “Germany’s existing party system has won itself another four years.”