In Stratfor's 2018 Annual Forecast we said that negotiations to form a new coalition government in Germany would continue for the first months of 2018. Without a government in place in the European Union's largest economy, we also said that reforms at the European level would not progress. Now Germany officially has a new government in place, but divisions within it and between Northern and Southern Europe still make controversial reforms challenging.
Angela Merkel's historic fourth term as chancellor of Germany isn't off to a good start. The parliament elected her to another four-year term March 14, but she won the post by a bare majority of nine votes. The grand coalition of her Christian Democratic Union (CDU), the Christian Social Union (CSU) and the Social Democratic Party (SPD) controls 399 seats. Merkel needed 355 votes and she got 364. That weak support, coming six months after parliamentary elections, reflects the lingering opposition to the alliance and bodes ill for domestic legislation and European Union negotiations.
While Merkel's position should be safe — the German system makes it hard for the opposition to oust a chancellor — her government is facing an uphill battle complicated by dissent within the coalition. Since the vote in the Bundestag was secret, it is impossible to know which members of the coalition voted against her or whether she received support from opposition parties. The SPD has been internally divided on joining the alliance, and some of its members may still oppose it. In addition, members of the CDU and the CSU have already criticized the SPD's positions on domestic spending and EU reform. These disputes may lead the conservatives and the Social Democrats to try to differentiate their positions to become more attractive in a future election.
In an apparent attempt to ease tensions and calm conservative fears that a government including the SPD could lead to higher public spending, Finance Minister Olaf Scholz, an SPD member, said on March 12 that he would continue the policies of his predecessor, the conservative Wolfgang Schaeuble. The government will continue striving for balanced budgets, also known as "black zero" budgets, and avoiding any new debts.
Looking at the European Union and eurozone, Scholz said that reforms for those two organizations were important concerns for Germany, but that the bloc is divided on what policies to introduce. Northern European countries have warned against introducing ambitious reforms that would increase the sharing of financial risk in the bloc. They have also warned that Germany and France cannot discuss EU reforms without including the other member states. After dining with eight Northern European finance ministers on March 12, Peter Altmaier, then the interim finance minister and now the economy minister in the new government, noted that Northern and Southern Europe still disagree on some eurozone reforms.
Meanwhile, French President Emmanuel Macron and Merkel were expected to present their reform plans during the European Council on March 22-23, but media reports now suggest they are not ready to come up with a common list of proposals. Merkel has admitted that negotiations with France on the eurozone reform will be slower than expected.
In the months ahead, the German government may be hobbled by conservative resistance at home and pressure from abroad. Inside the coalition, the conservatives of the CDU/CSU are worried that the SPD wants to make too many concessions to France and are likely to remain extremely cautious. And Germany's northern partners will slow down proposals for eurozone reform.