German Elections
Merkel Strengthens Her Hand

Angela Merkel struck a third blow to the hopes of the her rival Martin Schulz this weekend, as her Christian Democrats staged an upset electoral victory in Germany’s most populous state. FT:

The Christian Democrats took control of North Rhine-Westphalia, upsetting the odds in the traditionally Social Democrat stronghold and dealing a heavy blow to SPD leader Martin Schulz as he bids to unseat Ms Merkel in Berlin. […]

According to preliminary final results, the CDU won 33 per cent in Sunday’s vote, well up on the 26 per cent they scored in the last election in 2012. The SPD saw its vote plunge from 39 per cent to 31.2 per cent, its worst result to date.

The CDU enjoyed a late surge in support, charging SPD with being weak on security while appealing to Merkel’s image as an experienced, steady hand capable of guiding Europe. The CDU’s tougher line on security and immigration also helped neutralize the far-right AfD, which underperformed the polls on Sunday.

Ahead of September’s national elections, though, Merkel will likely add fiscal issues to the pitch—and that will complicate life for both Schulz and Emmanuel Macron. Ahead of Sunday’s election, Schulz took the surprising step of backing the new French president’s calls for a common Eurozone budget and a relaxation of Eurozone spending rules. But Merkel has taken a harder line on the matter, playing to tight-fisted Germans’ fears’ that such reforms would transform the EU into a “transfer union”, giving handouts to less responsible member states. Top CDU officials like Finance Minister Wolfgang Schauble have already signaled that Macron’s more ambitious proposals for closer integration—like a common Eurozone budget run by a common finance minister—are dead on arrival. In the lead-up to September, expect the party to harden its line further, resisting Macron’s early reform efforts while accusing SPD of being the party of fiscal irresponsibility.

And if, as expected, Merkel and her party win big in September, their fiscal mandate will only be strengthened. In that case, Macron may have to settle for Schauble’s favored, modest reform proposal: the creation of a European Monetary Fund that would increase the EU’s ability to monitor states’ financing while ignoring Macron’s calls for deeper fiscal integration.

Much can change in four months, of course, and Macron is already beginning discussions on Eurozone reforms in Berlin today. But if CDU’s current momentum is any indication, it will continue to be Merkel and Schauble, not Macron or Schulz, calling the shots on Europe’s fiscal agenda.

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