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Germany: Will internal affairs distract from EU reform? | Analyst Picks | RiskMap 2020


Germany risk forcast

Will internal affairs distract from EU reform?

The future of German Chancellor Angela Merkel, the longest serving leader of a G7 or EU member state, remains highly doubtful as we enter 2020. As a result, the EU is likely to remain stuck in a holding pattern.

Nominally, Merkel’s term will only end in late 2021. However, she presides over an uneasy coalition of the centre-right Christian Democrats (CDU/CSU) and centre-left Social Democratic Party (SPD). The coalition has been marred by divisions since early 2018. The SPD in particular, has been at odds internally on whether to leave government throughout 2019. If the party loses its nerve in the face of continued heavy election defeats and poor polling results, the Merkel era will come to an early end.

What would it mean for investors and Germany’s partners if this credible scenario should materialise? They would almost certainly face an extended period of uncertainty due to the country’s increasingly fragmented political landscape (see figure below). The most likely outcome would be another coalition consisting of parties with diverging ideological outlooks and policy priorities. In practice, this would mean months of complicated coalition negotiations, in which policymaking is effectively paused. Moreover, investors may not have heard of some of the protagonists entering the stage when Merkel departs as both the CDU and the SPD are engaged in debates about key personnel.

Meanwhile, initiatives to launch significant reforms at the EU level will continue to progress at a snail’s pace. These reforms would address existential issues such as strengthening the eurozone, increasing the bloc’s international competitiveness, migration and climate change, but not much will happen without Germany’s blessing. Without knowing where Berlin stands on an issue, other member states will hesitate to show their hand, and as long as Germany is preoccupied with itself, meaningful reforms will effectively be on hold.



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