MERKEL´S TWILIGHT ARRIVES / GEOPOLITICAL FUTURES

Merkel’s Twilight Arrives

Angela Merkel’s legacy may not be all she hoped for – but her successor won’t have it much easier.

By Ryan Bridges

Tomorrow marks Angela Merkel’s 4,748th day as German chancellor – that’s 13 years. It’s been a remarkable run for Germany’s first female chancellor, one who led Europe’s greatest power through the global financial crisis, the European sovereign debt crisis and the refugee crisis. For nearly half that time, German pundits have been predicting “Merkeldämmerung,” Merkel’s twilight. Finally, it has arrived. In late October, amid historically low approval ratings for her Christian Democratic Union party, Merkel announced that she would not seek the position of party chief again. The CDU will vote on her replacement in just over two weeks. The winner of that race will be the favorite to replace Merkel as chancellor in 2021 – if her government makes it that far.

 

The Chancellor’s Legacy

Merkel will hardly be remembered for leading Germany out of its difficult post-reunification years and into a time of great prosperity, though she did. (In August 2018 unemployment in the country was at 5.2 percent, the lowest level since reunification, and down from 11.5 percent in November 2005.) Instead, she will forever be known as the chancellor who offered up German savings to defend the eurozone. That series of decisions culminated in the move to bail out Greece in 2015 rather than allow a Grexit and in the process gave rise to the far-right Alternative for Germany party, which has sapped the CDU’s support. Merkel also will be remembered for refusing to close Germany’s borders during the 2015 Syrian refugee crisis (a call that was short-lived and mischaracterized as “opening the borders” – Europe’s internal borders were already open), allowing more than 1 million people to enter the country in a span of two years. Before those critical decisions, the CDU had for a couple of years consistently polled above 40 percent; today its approval is in the mid-to-high 20s, an all-time low.

It would have been extraordinarily difficult for any German leader to have acted otherwise. Saving Greece – at what will probably prove to be a prohibitive cost for the Greeks – may have prevented the collapse of the eurozone. And without the eurozone’s ease of trade, the German economy would suffocate. When Germany opted to temporarily waive EU asylum procedures for Syrian applicants, it opened a relief valve for the overwhelmed Hungarian government. Once asylum-seekers in Hungary began marching toward the Austrian border, there was no realistic way to stop them short of border closures, which would have rippled throughout the Schengen zone and disrupted vital trade. These decisions took courage, but they were the least-bad options available. They also proved to be political suicide.

 

The Successor’s Challenge

Difficult decisions abound for the next chancellor. Germany’s export-oriented growth model has taken the economy to new heights, but it is now dangerously unbalanced at a time when global consumption is slowing. If the German economy can’t adapt to the 21st century, it will lose its place. The United States and Asia, especially China, have a head start in the sectors that will define the future, and Germany will need a strategy – preferably a European one – for dealing with China’s economic rise. Eurozone growth is slowing, however, and the bloc hasn’t completed the reforms that would help it weather the next recession substantially better than it did the last. The U.S., meanwhile, is gradually but increasingly treating Europe, in the U.S. president’s own words, as a “foe.” Europeans are beginning to accept that this particular U.S. strategy may outlast Donald Trump.

But as it was for Merkel, the course for her successor is mostly set. Efforts to modernize German manufacturing are already underway. The government has set aside 1 billion euros ($1.14 billion) for electric-vehicle battery ventures, and another 500 million euros could be made available to fund a factory researching solid-state battery technology, which is expected to supplant lithium-ion batteries. This month, Berlin announced plans to invest over 3 billion euros in artificial intelligence by 2025.

That’s a start, but the German economy still relies far too heavily on exports. According to the World Bank, more than 47 percent of Germany’s gross domestic product came from exports in 2017, the highest level of any major economy. The Great Recession could have been a moment of reflection for Germany, but it wasn’t – exports rebounded quickly, and the Germans concluded that their economic model works just fine. The next crash could be different: The U.S. has become more protectionist, and China isn’t buying German cars at the rate it used to. The necessary reforms will be every bit as painful as the decisions Merkel made in 2015; they will require Germans to do nothing less than redefine who they are.

 

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Berlin, therefore, is unlikely to embrace change until a crisis makes it unavoidable. The trouble is that in the midst of such a crisis, the eurozone will necessarily be in recession. Germany is the eurozone’s growth engine, so a slowdown there drags everyone down. And Europe is not significantly better prepared to deal with a serious recession today than it was a decade ago. Three member states – Greece, Spain and Italy – still have double-digit unemployment rates. As of 2017, youth unemployment was above 20 percent in eight EU member states, compared with 9.2 percent in the U.S., and in the second quarter of this year, Greece, Italy and Portugal had public debt levels well over 100 percent. France has been pleading with Germany to help push through reforms, like the establishment of a joint banking union and an EU finance minister, to no avail. (Berlin has finally accepted Paris’ call for a euro-area budget, but it’s nowhere near the amount France wanted.) And the popularity of euroskeptical governments could elevate the risk of miscalculation and catastrophe in future bailout negotiations, not unlike what happened when the Syriza party came to power in Greece in January 2015. When judgment day comes, the next German chancellor may have to expend precious political capital rescuing fellow eurozone members while Germans themselves are hurting. But Merkel could not let the euro collapse, and neither can her successor.   The New World Order The next chancellor will also have to find Germany’s, and Europe’s, place between a rising China and the United States. Germany had high hopes for economic relations with China. In 2005, only 2.8 percent of its exports by value were bound for China; in 2017, that number was 6.7 percent, making China Germany’s third-largest export destination after the U.S. and France. Today, however, government and business opinion has started to turn against China. Chinese investments in certain sectors are viewed with suspicion, and the country is increasingly seen as a competitor for other markets. According to Reuters, the influential Federation of German Industries is preparing a position paper warning German firms to reduce their dependence on the Chinese market, which the federation says is unlikely to open up as Beijing has promised. Berlin is also working on plans to give it more veto power over foreign investments in strategic sectors, a measure aimed mostly at China. At the same time, senior officials are trying to block Chinese firms from constructing Germany’s 5G infrastructure. While Germany would like to get all EU member states on the same page, most imperative for Berlin is that it and the other most advanced manufacturing states align on China. So far, at least, they have.

 

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Yet German industry can’t afford to turn its back on a major market like China, especially amid trade frictions with the United States. Trump is still holding the threat of car tariffs over the heads of Germany’s proud but battered automakers, and it’s getting harder to claim that the frictions between Europe and the U.S. are only about trade and not about greater strategic disagreements. In the past year, Trump has threatened the entire EU for trying to keep the Iran nuclear deal alive, proposed a speedy free trade agreement to entice the U.K. into pursuing a looser relationship with the EU, suggested that France abandon the EU for its own trade deal with the U.S., lambasted French President Emmanuel Macron on Twitter for proposing a European army, offered to buy Italy’s public debt more or less fund to its budget fight with Brussels, and, of course, repeatedly railed against Germany for its massive trade surplus and its construction of the Nord Stream 2 pipeline project, which links the country to Russian natural gas supplies. The Cold War is over, the interests of the U.S. and Europe have diverged, and Europe’s leading powers are no longer content to be the junior partners in an alliance that doesn’t always serve their interests. Western Europe is still in the early stages of formulating its response­ – a task that will fall in part to Merkel’s replacement. Germany has had three chancellors since the Soviet Union fell. Helmut Kohl reunified West Germany and East Germany and signed the Maastricht Treaty, creating the European Union as we know it and laying the groundwork for the euro. Gerhard Schroeder presided over the euro’s implementation and rebuked the U.S. over the Iraq War. And Angela Merkel divided Germany while defending its long-term interests. From preparing Germany’s economy for the future to keeping the eurozone together to reimagining Europe’s place between the U.S. and China, whoever comes next won’t have it any easier.