This had been a good year for the European Union (EU) until the results of the German elections came on 24 September. During 2017, elections had seen attempts by right and left-wing populists to gain power in the Netherlands, France and Austria. The European economy had entered its fifth year of recovery, with a forecast growth of 1.6% for 2017 (low in Indian terms, but significant nevertheless). On Sunday, 24 September, the stunning result of the right-wing alternative for Germany party brought any celebrations to a grinding halt and has resulted in a bout of sober reflection throughout the capitals of Europe. Last year, the defeat of the far-right Norbert Hofer in the Austrian presidential election acted as a prelude to the success of the centrists throughout 2017. Now the results of the forthcoming Austrian legislative elections on 15 October are keenly anticipated to see if there will be any contagion from neighbouring Germany in the support of the Freedom Party of Austria, a right-wing populist and national conservative party. Following Austria, the next test will be the Italian elections which, according to the constitution, must be held no later than 20 May 2018. The surprising resurgence of the centre-right Forza Italia and the anti-immigrant Northern League in the mayoral elections across Italy in June this year, not good news for the EU, was counterbalanced by the decline of the anti-EU 5-star movement. Whatever the results of the Italian elections, there will be no shocks similar to that in Germany.
Had Angela Merkel’s party achieved the anticipated 36% in the poll, the way would have been open for her to lead the much-needed reform in the EU.This will now be difficult even if she manages to achieve a coalition with the right-of-centre Free Democrats and left-of-centre Greens, never been done before, which in theory would give her a stable platform from which to carry out any reforms. It will take many months of bargaining to achieve any agreement, but it is the only solution left to Merkel to have a majority of seats in the Bundestag. Don’t anticipate any early announcement, however, as the Greens will insist on an immediate closure of the heavily polluting brown coal power stations and the Free Democrats have made no secret of their distaste for just about all of Macron’s EU reform proposals. Another “grand coalition” has also been discounted as the heavily defeated socialist party of Martin Schultz, formerly a partner with Merkel, which he claims contributed to his defeat, will now be licking its wounds as the party of opposition in the Bundestag.
Mercron, that delicious fusion of Emmanuel Macron, the wunderkind president of France, who was recently reported to have spent 26,000 euros on his make-up in the three-months since his election, and Angela Merkel, who most certainly has not spent that amount on hers, will now have only limited opportunity to achieve reform. Macron’s image was tarnished over the weekend when his party, LaRepublique en Marche, surprisingly won only 23 of the 171 seats up for grabs in the Senate elections. How true is the old saying “a week is a long time in politics!” From a position of strength, suddenlyboth Germany and France have weakened leaders. The question is, will it be a case of Merkel and Macron individually attending to their domestic problems over the coming years, or will it be Mercron moving forward with the much needed EU reforms?
Of the long list of urgent EU reforms on the table in Brussels, which include defence and security, the most important is the future of the economy. France runs a huge trade deficit, while Germany runs an enormous surplus of more than $270 billion, of which $35 billion is with France alone. Unemployment in France is currently about 9.5%, while only some 3.9% of German workers are unemployed. Germany is France’s biggest trading partner, but France comes second to China in German trade. The Germans have always favoured strict spending rules, good housekeeping and control of inflation, while the French regard public spending as a way of responding flexibly to a crisis. These opposing approaches define the two countries attitude to the EU economy. When he was France’s economy minister, Macron gave a speech in August 2015 likening the two approaches to a “religious war” between the austerity minded Calvinist states in the northern EU, such as Germany which he did not mention by name, with the profligate Catholic countries in the south (he included France in this group). He argued that the EU should find a balance between these two approaches. As president, Macron is undertaking a series of ambitious economic reforms, re-energising the French labour market by making labour laws more flexible and aligning France’s public finances with Eurozone budget rules. As quid pro quo he is arguing that Germany should agree to greater risk-sharing within the Eurozone, thus gently taking steps towards solving the Achilles heel of EU finances, the lack of fiscal union. Germany has always resisted any attempt towards any form of Eurozone budget as voters in the past have firmly declared that they would never support hard-earned German money being passed to southern states, whose people they perceive to be lazy, having short working hours and long holidays! Some form of fiscal union is however essential for the health of the euro. Without it, it is doubtful that the euro will survive.