Mrs. Merkel’s Lost Gamble: A Threat to Free Market Reforms

On Sunday September 22, 2013 Germany held its national parliamentary elections. The result, as expected, was a major victory for German Chancellor Angela Merkel. Her Christian Democratic Union/Christian Social Union won 42% of the vote giving them 5 seats short of an absolute majority. Thus, the three left-wing parties – Social Democrats, Greens and Left – have a slight majority of seats. But, as the Left party is the former Communist party of East Germany, the Social Democrats refuse to form a coalition with them.

The major jolt in the results was the failure of the Free Democratic Party to achieve enough votes to gain seats in the parliament. This was the first time since the first post-war election in 1949 that the FDP was not represented in parliament. For most of those decades it was in coalition with the CDU (as in the most recent ministry) although in the 1970s it was in coalition with the Social Democrats.

In Germany, voters have two votes: one for a candidate in the district, and one for a national party list. In the past, CDU voters often cast the second list-ballot for the FDP list. Rarely has the FDP elected district candidates (in this election it did elect members in the provincial election for the Hesse assembly); so the second ballot votes have been crucial. However, in this election Chancellor Merkel called on CDU voters to cast the second ballot for the CDU and not for the FDP. Perhaps she did not wish another coalition with the FDP which the CDU members would want if FDP were in the parliament. She seemed to be gambling that the CDU could gain a majority of seats in the parliament precluding any coalition for the coming term. While it came close, this long-shot gamble failed, and the FDP lost along with the Chancellor.

It is probable that this term will be Mrs. Merkel’s last so she does not need to follow the fiscally conservative CDU voters. Despite her popularity, she knows the fate that befell Helmut Kohl in the 1998 election. Voters were tired of him; he should have stepped aside for his successor, the interior minister, Wolfgang Schauble, who would have won. Schauble has been Mrs. Merkel’s finance minister and maybe again in the new ministry. (Schauble was shot in 1990 by a fanatic and paralyze from the waist down.)

The Free Democratic Party was formed after the Second World War in the zones occupied by British, French and US troops. The leader of the new Free Democratic Party was Theodor Heuss (1884-1963) who had been a Liberal member of the Reichstag in the Weimar Republic. A graduate of the University of Munich, Heuss was a major figure in the writing of the new 1948 German constitution. The FDP is described as a supporter of individualism, free market capitalism and civil liberties. In the first German parliamentary elections, FDP received almost 12% of the vote with strongest support in Hesse and in Baden-Wurttemberg. Heuss was elected the first president of the German Federal Republic in 1949, serving until 1959.

The FDP supported the policies of the German Economics Minister, Ludwig Erhard, which created strains with the Chancellor Konrad Adenauer. In the 1957 elections, Adenauer had some FDP ministers establish a separate party which failed to oust the FDP. A new FDP leader, Erich Mende, rebuilt the FDP and gained 13% in the 1961 elections. Mende was FDP parliamentary leader, 1957-63, and chairman, 1963-68.

FDP’s conditions in 1961 for a coalition were that Adenauer step down as chancellor in two years to make room for Ludwig Erhard. After Mende, the FDP became social liberal and joined a coalition with the Social Democrats. In 1982 a new leader of the FDP, Otto Graf von Lamsdorff, created a coalition with Helmut Kohl and the CDU. Hans-Dietrich Genscher (1927-) who had been FDP foreign minister since 1974, continued as foreign minister until 1992.

In the 2009 elections the FDP received their highest ever vote (14.6%, and 93 seats) due to the second ballots of the CDU voters. In September 2013 the FDP received 4.8% below the 5% minimum to enter the parliament. Most of the loss was CDU second ballots, but also a defection of some to the new euroskeptic Alternative for Germany party which received 4.7% of the vote.

Angel Merkel had the SDP as junior partners in her first government (2005-2009) and the SDP suffered its lowest vote in 2009. There is worry in the SDP that joining now with the CDU will be suicidal. SDP chairman Sigmar Gabriel said: “Now that Mrs. Merkel ruined her current coalition partner, the SPD isn’t going to wait in line to be the next one.” The Wall Street Journal editorialized over the tragedy of Angel Merkel’s failure to pursue the market reforms advocated by the FDP and over the prospective coalition with the Social Democrats: “The real cost for Mrs. Merkel of a left-right government will be domestic economic reform because the SPD’s main agenda is higher taxes and spending. Germany remains the economic star of the euro zone, but that is a low bar. German industry is stagnant, labor laws are still rigid, and rising energy costs from green subsidies threaten Germany’s competitiveness.” (“Merkel’s Continent Triumph.”) In a lengthy warning on the eve of the election, The Wall Street Journal described the dangerous state of the German economy if Mrs. Merkel pursues her inclination not to push market reforms. It quotes an executive of the Federation of German Industries: “We’re living on yesterday’s reserves.” (The Wall Street Journal, September 20, 2013).

In a brilliant Wall Street Journal op-ed, Josef Joffe (editor of the weekly Die Zeit and fellow of the Hoover Institution) noted of Mrs. Merkel betrayal of the FDP: “The hallmark of the new German consensus is an all-providing state that taxes, spends and regulates.” With the absence of the Liberals, Joffe writes: “Gone is the one and only party that is supposed to stand for free-market economics, low taxes and small government.” Of Mrs. Merkel’s victory, Joffe says: “But, remember Midas, the mythical Greek king, who faced starvation because his touch turned everything – food and drink included – into gold. Chancellor Merkel appears to have the same touch. …But her golden bowl is empty. Five seats short of an absolute majority, she will have to pass it around and beg for help from a coalition partner.” (Josef Joffe, “Merkel’s Gilded Status Quo,” The Wall Street Journal (September 24, 2013).

Quentin Peel writes: “For a start, the disappearance of the FDP will make a difference. The party has been a pale shadow these past four years … But it has always been a champion of less government and more market-oriented policies. All the parties left in the Bundestag, including Mrs. Merkel’s Christian Democrats are instinctive regulators. That is true of financial regulation, and measures such as a financial transaction tax, which is common ground for the CDU/CSU, the SPD and the Greens. The FTT may never get off the ground in Europe but it will not be for want of trying in Berlin. … FDP doubts about eurozone bailouts were always a worry for Mr. Merkel.” (Financial Times, September 26, 2013). The shift of voters from the FDP to the new euroskeptic party destroyed their own goals of limiting pro-euro acts.

Finally, the opposite of a brilliant article was offered by Martin Wolf in which he opposed the past economic programs and the European Zone policies of the German coalition government. He seems to wish the Germans to bankrupt themselves by lavish spending on already bankrupt Greece. (Financial Times,September 25, 2013)