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    ‘Mädchen’ to ‘Mutti’: Merkel’s departure raises questions for Europe

    ‘Mädchen’ to ‘Mutti’: Merkel’s departure raises questions for Europe
    Stéphane Monier - Chief Investment Officer<br/> Lombard Odier Private Bank

    Stéphane Monier

    Chief Investment Officer
    Lombard Odier Private Bank

    Angela Merkel, the European Union’s longest-serving incumbent leader, announced last week that she would step down as head of Germany’s Christian Democratic Union (CDU) party in December and won’t run again as Chancellor. Mrs Merkel’s announcement at a time of European Union stress may prove more significant for the bloc and investors exposed to the common currency than Germany’s politics.

    Mrs Merkel’s fourth term as Chancellor ends in 2021, and for now markets have not priced-in uncertainty about whether she is likely to see out the full mandate.

    The trigger to Mrs Merkel’s announcement on 29 October was a collapse in the coalition’s share of a regional vote in the German state of Hesse. Both the CDU and Social Democratic Party (SPD) sank by double-digit percentage points, their worst results in decades, as the far right Alternative für Deutschland (AfD) and the Green Party recorded gains. That followed an equally poor result in Bavaria’s elections. The votes were widely seen as protests against the extended bickering between the two coalition parties. “This can’t go on,” concluded Mrs Merkel.

    Thirteen years after Mrs Merkel became Chancellor, it is easy to forget that once, she was both underestimated and overlooked. Mrs Merkel spent seven years as a minister in the post-reunification government of Helmut Kohl where, to her irritation, he would patronisingly introduce the former quantum chemist as “mein Mächen” (“my girl”). An ex-German Chancellery official, Wolfgang Nowak, said “we all underestimated her… we didn’t see that she has a sharp, analytical mind.”

    Merkel’s ruthlessness often went unnoticed too. Then in 1999, as then CDU secretary general, she was the first to call for Kohl’s resignation over a campaign finance scandal. Weeks later she succeeded Kohl as CDU leader. “I brought my killer close to me,” Kohl said later. John Kornblum, a former US ambassador to Germany, phrased it equally bluntly: “If you cross her, you end up dead.”

    Export dependent

    Merkel is stepping away from a German economy with unemployment at its lowest levels since reunification and which has recorded the highest trade surplus in the world for the last three years (in part thanks to the strength of its car industry). This has made Germany’s economy highly dependent on exports. It now needs to stimulate domestic demand by lowering its current account surplus so that it is not impacted every time the rest of the world’s economy slows (see chart).

    Germany’s political stability under Merkel, in the form of “grand coalitions”, helped guide Europe through the financial and subsequent eurozone crises, even if economists differ over whether Merkel’s policies prolonged austerity or saved the euro at the price of high unemployment in Greece. That stability was tested over six months of negotiations to form a government that finally ended in March this year with another “grand coalition” and now may be tested again.

    She has also been criticised and lauded for her handling of the EU’s financial stability. In 2011 during the Greek euro crisis Mrs Merkel earned the label “leader of Europe.” Yet as the economist Joseph Stiglitz has pointed out, faced with a critical German electorate she painted the Greek euro crisis as the result of irresponsible borrowing, rather than irresponsible lending, often by German banks. In Italy, where memories of Mrs Merkel’s support for austerity and slowness in committing support during the euro crises are still fresh, reaction to her planned departure has been muted. The Italian government is in the midst of renegotiating its budget and so political attention focuses on relations with the European Commission.

    Beyond financial austerity, the single issue that defined Merkel in Germany remains her courageous decision in 2015 to open Germany’s borders to migrants by suspending EU rules that call for asylum seekers to register in the first EU member state they reach. In part, the decision was motivated by the recognition that Germany’s working population is shrinking. In retrospect, the price for that decision was political stability.


    Succession planning

    Merkel’s lifespan as Chancellor now depends on who replaces her as the CDU head in December. In the short political term, if today’s fragile alliance between the CDU and SPD collapses, it may trigger federal elections and push Mrs Merkel out of the Chancellery sooner. Mrs Merkel’s predecessor, Gerhard Schröder, survived as Chancellor for 18 months after he resigned as Chairman of the SPD. At the time, Mrs Merkel said that Germany’s Chancellor should also head their political party.

    A former rival, Friedrich Merz, a lawyer who left politics after crossing Mrs Merkel more than a decade ago, has also said he will stand. Mr Merz, a Europhile advocate for a strong relationship between Germany and France, is currently Chairman of BlackRock Germany’s supervisory board, among other corporate appointments. He also has the backing of the CDU’s business lobby.

    Mrs Merkel is thought to favour CDU secretary general, Annegret Kramp-Karrenbauer as her successor. Health minister and regular Merkel critic Jens Spahn, and Armin Laschet, the state leader of North Rhine-Westphalia, also plan to run. While commentators point to a Europe-wide decline in ‘big-tent’ political parties and a rise of extremes, in the German political landscape it is possible that the election of either Mr Merz or Mr Spahn may shift the CDU more to the conservative right, stealing back some of the AfD’s voters.

    And given that Mrs Merkel lent only lukewarm support to French President Emmanuel Macron’s vision for a more federal union, Merkel’s successor may provide an opportunity for more support to a vision for closer ties.

    More broadly, we expect Eurozone GDP in 2018 to be slightly below 2%, and that the region will continue to grow in the coming quarters above its potential. That should translate to the European Central Bank sticking to its plan to end asset purchases this year, and negative rates in 2019.

    In an environment of security threats, the European Union’s fractious divorce with the UK, and an unpredictable and chaos-inducing US President, the continent is in great need of focused political vision and stable leadership.

    Important information

    This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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