German elections ‘positive for the euro’

Whatever the coalition outcome, Germans back the single currency

[Published today in  the OMFIF Bulletin]

The German elections conclusively disprove the idea that Germans are against the government’s support of the euro and the countries in the periphery. That’s why I believe the poll on 22 September, despite the slightly confusing outcome, is basically positive for Europe and the euro.

The coalition negotiations will be complicated and not easy to read, since the parties are playing a tactical game. But, looking beyond and beneath the bargaining, it is difficult to envisage another outcome that would be more favourable to Europe. That doesn’t mean I expect drastic changes in German policy towards Europe. But it’s important to realise that the elections were a resounding victory for pro-Europe parties, which represent roughly 90% of the Bundestag and 80% of the voters.

As a consequence, Chancellor Angela Merkel should be emboldened to pursue the policy she has followed so far, under which, in a down-to-earth yet sometimes over-hesitant manner, she has effectively protected the euro area.

One cannot exclude that, in finding the optimal point on the trade-off between maintaining domestic support and more advanced solutions for Europe, she would move somewhat towards the latter. Two arguments reinforce this conclusion. The Free Democrats, Merkel’s previous coalition partners, who have been lukewarm on Europe, will be replaced in a future coalition by the Social Democrats or Greens, who are more open to European solutions. Second, Merkel will not be a captive of the right of her party and of the Bavarian Christian Social Union, as would have been the case had she won an absolute majority.

A lot has been made of the relative success of the anti-euro Alternativ für Deutschland. Development of this new party has to be closely followed. However, winning just under 5% of the votes in an election, or even having the sympathy of 25% of overall voters (as opinion polls suggest), against 70% who are supporters, doesn´t strike me as dangerous, at least for now.

In the years following Italy’s political unification in 1861, I believe that probably far more than 5% of Italians believed a southern lira should remain in being, separated from the northern lira. Nonetheless, the lira remained intact as a combined currency until it was replaced by the euro in 1999-2002. I believe that the same long life awaits the euro.