Merkel’s deteriorating political muscle severely hampers Europe

German Chancellor Angela Merkel’s waning political star comes at an awkward time for the European project of greater political and economic integration.

The Brexit negotiations are now reaching a crucial stage; French President Emmanuel Macron sorely needs a serious German partner to push forward his European reform agenda; and potentially destabilizing Italian parliamentary elections are scheduled to take place in March next year. 

{mosads}Should the curtain now indeed be falling on Merkel’s 12 years as German chancellor, her steady hand and decisive leadership in defusing earlier European economic crises will surely be missed as Europe tries to navigate its way through the many challenges that lie ahead. This could spell real trouble next year for the European economy. 

The proximate cause of Merkel’s current political troubles is the drubbing that her Christian Democratic Party received in September’s German parliamentary election primarily on the immigration issue.

With a significantly reduced parliamentary majority and with the Social Democrats declining to again enter into a grand coalition, Merkel was forced to try to form a government with the Greens and the Free Democratic Party.

Both of these latter parties had definite views and specific red lines for the formation of a coalition government that Merkel could not meet. Those red lines have now resulted in the irretrievable breakdown in the coalition talks. 

While there are a variety of possible scenarios as to how Germany’s current political crisis will resolve itself, it would seem that in any of those scenarios, Germany, Europe’s erstwhile rock of stability, is likely to suffer a prolonged period of political instability.  

In the very likely event that Germany is forced to have another parliamentary election next spring, there is no reason to think that a new election will produce a very different result from the last election or that it will lead to the speedy formation of a stable German government.

If, on the other hand, Merkel tries to form a minority government, her ability to run an effective government will have been seriously diminished, and there will always be the threat of new elections. 

Among the more immediate issues on which Merkel’s skill at European consensus-building will be missed will be that of Brexit. Negotiations between the United Kingdom and its European partners on this issue are reaching a crucial stage with a decisive meeting to take place in mid-December. 

There is now the real risk that without Merkel’s effective voice of moderation, the European position on Brexit will harden. That could set the stage for the U.K. crashing out of the European Union without an agreement in March 2019 when the negotiations under Article 50 of the Lisbon Treaty are due to expire.

An authoritative Merkel will also be missed by President Emmanuel Macron, who has recently proposed a series of constructive reforms to the eurozone project aimed at deeper economic integration.

Over the years, Merkel has proved herself to be a true believer in Europe and to be capable of carrying along a reluctant German public to fully support the European project. With her political authority at home now seriously undermined, there is the risk that much needed reforms to the eurozone being proposed by President Macron will languish.

During the eurozone sovereign debt crisis, Merkel distinguished herself time and again as the dominant political figure in Europe who succeeded in patiently building consensus among the eurozone’s membership to keep it together.

With contentious Italian parliamentary elections scheduled to take place early next year and with the Italian economy still characterized by very high debt levels and a weak banking system, it cannot be excluded that we will have yet another round of the eurozone sovereign debt crisis. 

Without Merkel effectively at the helm, there is the all-too-real danger that Europe will lack the political will to provide Italy with sufficient financial support to keep that country in the euro. 

For all of her faults, Merkel has stood out as the European leader able to successfully forge a consensus among the eurozone’s disparate member countries to meet Europe’s many economic challenges. Sadly for Europe, it is far from clear that her successor will have either her vision or her political skills to keep the European project together. 

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.