Merkel re-elected for third term in second grand coalition with SPD

Wearing a black trouser suit and a tired smile, German chancellor Angela Merkel was re-elected yesterday for a third term as German leader.

After a three-month marathon, Merkel secured the support of 462 of 631 MPs in the new Bundestag, some 42 votes short of the four-fifths majority enjoyed by her coalition of Christian Democratic Union (CDU) and Social Democratic Party (SPD).

Merkel has promised German voters her incoming government will, by the end of its four-year term, leave “people better off than today”.

Her feel-good message is in marked contrast to Taoiseach Enda Kenny’s Sunday night televised address that “everyone knows that you can’t keep spending more than you are earning”.

Those words could have been lifted from a Merkel speech circa 2010 when, in the midst of the euro crisis, she was under pressure from all sides to stabilise the euro zone by backing debt-financed stimulus.

She resisted, insisting Europe could not go on spending more than it earned. She eventually backed budgetary assistance for crisis countries, but only after shifting the debate towards sustainable public finances, framed by EU budgetary rules with real bite.

Ahead of dinner in Paris tonight with French president François Hollande, Merkel will insist in the Bundestag this morning that her grand coalition will tackle “grand tasks”.

Behind her reform reputation abroad, however, lies a canny politician who has enjoyed the positive effects of reforms more far-reaching than anything she has implemented at home. Behind her reform rhetoric, Merkel’s new grand coalition could yet be an old-school Irish “ah sure, you’re grand” coalition.

While Dublin presented its first solo economic programme yesterday, the first item on Berlin’s agenda is pension giveaways. Merkel wooed older women voters in September with the promise of higher pensions; the SPD promised to roll back the retirement age for long-time workers.

Fiscal time-bomb
In coalition talks, rather than compromise, the two parties decided to implement both plans, increasing pension contributions to cover the forecast cost of €15 billion by 2015 alone.

Younger German politicians from both the CDU and SPD have attacked the plan for pickpocketing future generations. In a rapidly greying country, many economists and analysts view the pension promises as a fiscal time-bomb straight out of the Charlie McCreevy “If I have it, I spend it” playbook.

“It’s pure clientelism,” says Prof Lothar Probst, political scientist at the University of Bremen. “The majority of German voters in the election were over 60.”

In her third term Merkel will enjoy perfect conditions for Germany's reform backlog: as well as a mammoth four-fifths Bundestag majority, the Bundesrat will be more amenable because SPD-ruled states have an upper-house majority.

But beyond pension promises, a new €8.50 minimum wage and an ambitious transition to post-nuclear energy, the new programme for government is dramatically light on detail. An overhaul of Germany’s byzantine tax code is likely to be long-fingered once more, as is a reworking of Germany’s complex and expensive federal system.

The last CDU-SPD coalition reacted quickly to the financial crisis and, to work off the resulting costs, introduced a legislative brake on debt- financed spending. Though poised to deliver a structurally balanced budget, German economists of all hues are unhappy with plans for the hard-won fiscal freedom.

Federal debt
Rather than a pension boost and roll-back of social reforms, one camp of economists would prefer the government tackled federal debt of €2 trillion – €25,700 per head. Another camp had hoped for economic stimulus measures with a greater reach.

Munich’s Ifo institute predicted yesterday that domestic German growth would accelerate to 1.9 per cent in 2014, but warned of downward corrections if the promised €8.50 statutory minimum wage proved a burden on companies in eastern states.

Redistribution, not reform, is what Ifo economist Kai Carstensen predicts for Merkel’s third term.

“She’s talked a lot about living within one’s means around Europe – with good reason – but she’s not personally convinced of the need for the state to only spend what it takes in,” he says.

“When Merkel’s political partner changes – as it has now – she can come around quickly to paying for rounds.”