By Christian Takushi MA UZH – 27 June 2018 (delayed public release 3 July 2018)
Over the past two weeks we have been working on three different research reports – Germany, Trade Wars Are Not Over and US Elections.
We are releasing our analysis on Germany first, because the CSU has threatened Merkel’s government. There is no quick solution for Germany – with or without a compromise Germany faces an erosion of her post-war Political Stability. The “center” parties CDU/CSU/SPD are paying the price for having abandoned their traditional right/left positions.
In Germany we see the media downplaying the real issue at stake. Even Consensus among European investors believes the main issue is that CSU and CDU disagree about the EU Immigration Law. Given the growing deviation (delta) of our analysis from consensus, we are releasing this report.
(The other two are becoming increasingly interconnected – so we may soon release a “merged” analysis spanning Trade Wars and the US Mid Term Elections)
German media & market consensus overlook the real issue threatening Merkel’s rule. It is not really the EU Immigration Policy as is being portrayed. The truth is that in a bit more than three months the CSU leadership is fighting for its survival against a rising AfD in Bavaria State Elections. For the 1st time in her history, the CSU fears about her future in Bavaria. A “bad” surprise can no longer be ruled out. In a desperate move, CSU leaders, Söder and Seehofer, have turned their bitter infighting on Mrs. Merkel. Their strategy is smart, but might be too little too late. They are attacking Merkel’s Immigration Policy in order to win back conservative voters and avert a disaster at home. Those who believe she leads a conservative party say “Merkel does whatever it takes to stay in power, but she has run out of options”. We disagree: We see signs of a “coup”. To offer EU countries a tougher Immigration Policy in exchange for bringing the EU Economic-Financial Policy Mix on a much more liberal-left course. Her problem is the short deadline Söder-Seehofer have given her. We think a compromise will be reached. I believe a deal is coming – Southern Europe will support Merkel’s immigration compromise in exchange for a quiet loosening of the austerity grip.
German Political Process – Not out of the shadows of WW2
The German Political Process is still highly underestimated and overlooked by investors, who rely mostly on German political analysts for their coverage. I have been following German politics for many years and I can still see that many German analysts and journalists are not totally free in what they can say in public. There is still a tendency to educate the public and shape public opinion for the sake of stability. Although it is well meant, the problem lies in the fact that a significant part of the media is state-controlled or state-related. Media in Germany is not as independent as many think it is. But that is a European phenomenon: Large state-owned quasi monopolists brag about their independence. It is the shadow of WW2 and a Political Process focused on avoiding a repeat of the 1930’s. Sadly, it is at times an obsession..
Media tells us that the CSU and CDU have a deeper disagreement concerning the EU immigration policy. The vast majority of analysts believe deep down this is just a power play between Merkel and Seehofer, one that she will win or settle via a (dirty) compromise as she has always done. They rightly believe that the CSU will accept it in order to stay in power. They are right on pointing to the addiction to power at the CDU and CSU. But this is where they stopped with highlighting the truth. If we go deeper, we see that both CDU and CSU used to be conservative parties – both on the right side of the political spectrum. But over the past two decades Merkel has steered both parties into the political center – with an increasingly liberal doctrine. That has been the strategy to stay in power. The explosive growth of German exports allowed for incomes to rise for the middle class, securing the CDU-CSU-SPD rule of the center. They neglected the Harz IV working poor, illegal mass immigration and the growing sense of fading security.
The shift to the “liberal center”opened a big door (vacuum) to the right – and the left to some extent. German leaders and media believed it was safe, because they could easily mobilise public opinion against any new potential party on the right flank. To their dismay, the AfD gained traction – millions of Germans rejected the narrative their media and government presented. The unpopular truth is that the CDU-CSU are highly responsible for the rise of the AfD – They pretended to be conservative while they had long embraced the liberal center. By 2010 there was no real major conservative party in Germany. According to our analysis only a minority of AfD voters are extremists – the majority are mainstream conservative voters that felt abandoned by both CDU and CSU. On the left, the Greens have also seized the vacuum that the once Socialist SPD abandoned to join the center. See the illustration below, where I show how German political parties have morphed while keeping their nominal names unchanged.
The reason why the CSU has threatened to sink Merkel ..
Is rather straightforward. In a bit more than 3 months the second most populous and highly successful German state of Bavaria holds Landtags-Wahlen (State Elections) and the CSU fears an earth-shattering shake-up. The end of her absolute majority in the Bavarian parliament. To make things worse her possible coalition partner (the FDP, liberals) are hovering around 4.8% to 5% of the votes and may fail to enter the parliament. And the Free Voters are bent on joining a new government to end the CSU rule. Even if the FDP makes it, it won’t be a coalition with a strong mandate.
Bavarians are punishing the established parties: The SPD may see her share of voters dwindle from 21% to a mere 14% or 13%. These are “unheard of” shifts in German politics. The SPD and CSU are paying the price for their steady shift to the center. The AfD and the Greens used to be extreme parties that are smartly positioning themselves closer to acceptable platforms for mainstream voters. The Greens are pivoting to the left of the SPD and the AfD has positioned herself to the right of the CSU. The days of German post-war Political Stability are counted.
Many say the rise of the AfD is impressive, but to us the more fascinating and probably more successful transformation belongs to another party: The Greens (die Grünen), long associated with radical environmentalists-leftists, have morphed into a liberal party with business-friendliness and environmental touch. While the AfD is Germany’s New Right, the Greens are de facto becoming Germany’s New Left. Although the AfD is trying to reach more moderate conservative voters, it is a party where moderates are in clinch with extremists still. Nevertheless, the AfD has successfully won over hundreds of thousands of former mainstream CSU supporters.
CSU fears a “Doppel-Pack”
For a party that has single-handedly dominated the fortunes of Bavaria since WW2, the loss of their parliamentary majority and of so many voters to the AfD is a bitter “Doppel-Pack” (double shock) for the CSU. The projected loss is likely to worsen both the current in-fighting and the identity crisis at the CSU. A split and even a downfall cannot be ruled out.
This brings me closer to my point – The CSU is now inclined to bring down the German government to avert a total disaster at home. Long addicted to power and to sitting in the Federal Government, the CSU is staging a desperate last move to avert the worse case. We are convinced that without the expected advance of the AfD at the October State Elections in Bavaria, the CSU would not be threatening to sink the German Government on immigration grounds. This is the downside of excessive German stability and the obsession with the past.
Until last week the CSU leaders hoped that their threat and ultimatum at Merkel’s address would suffice to reverse the trend. Most recent polls show no up-tick in support for the CSU though. Although Söder and Seehofer are tempted to abandon the government to distance themselves from Merkel and the EU immigration status quo, it might be too little too late to avert the rise of the AfD. But if they do end Merkel’s era, they might be able to stay at the helm of the CSU – starting the process to rebuild their base. They also know that after so many years of Merkel rule, millions of Germans are tired of her coalitions, her power politics. Many are hungry for change. Why not jumping off a doomed ship to present yourself as part of the alternative at the next General Elections?
Merkel’s Back Door – shifting the EU further to a liberal-left Policy Mix to win support for a new Migration Law
It would seem all clear. But it is not, because we are talking about Merkel and the art of staying in power. I have seen signs of Merkel aides working towards a deal that Seehofer and Söder could take home. A much tougher EU immigration Policy (on paper, with plenty of loopholes) in exchange for a much more liberal-left leaning-fiscally expansionary Economic-Finance EU Policy Mix. There is no need to issue new laws, the spending limits could be simply flexibilized. Without Britain’s conservative veto, Merkel could give up her economic orthodoxy. It would allow France and Italy to have a greater role in reshaping the EU. All of a sudden an EU Reform could be possible. Knowing how desperate Rome and Southern European states are to increase Fiscal Spending to finance campaign promises, this Merkel’sche maneuver would save her job and catapult the EU into unchartered fiscal waters – The kind that Maastricht was supposed to prevent. It may also lead to EU-financed asylum application & refugee centers in the Middle East and Northern Africa.
One thing is new: Never before has Berlin and the leaders of CDU and SPD been so powerless – at the mercy of Munich. It is Munich that in the coming days will decide the fate of Merkel, the German government and the future pace of the EU. We have forecast over the past two years that the EU will shift decidedly to the liberal-fiscal expansionary camp and that severe crises will allow the European Integration Process to regain momentum – and it could possibly be out of the ashes of the current structure. I believe a deal is coming – Southern Europe will support Merkel’s immigration compromise in exchange for a quiet loosening of the austerity grip. A compromise will also extend Merkel’s rule, projecting to the world an “artificial” German Political Stability that is actually fading away. Instead of bracing for the coming German Political System, businesses and investors are left unprepared.
Both scenarios (Merkel’s downfall and a fiscal-immigration deal) could impact the EURO. It is too early to call though. I will be closely monitoring events in Munich, Berlin, Paris and Rome in the coming days.
Germany has miscalculated domestically and externally. While we were writing this report, Germany was being ousted from the Football World Cup by South Korea. Maybe a sign of the times, and a moment of weakness in Berlin that Paris and Rome have long been waiting for.
Christian Takushi MA UZH, Macro Economist & Geopolitical Strategist, 27 June 2018 (delayed public release 3 July 2018) – Switzerland
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