German Elections and Consequences for the Eurozone

** Update: Doug Elliott has new analysis on the outcome of the German elections, noting that, for Chancellor Angela Merkel, the “results combine a great personal triumph with a political dilemma.”

Germany holds federal elections this weekend. Chancellor Angela Merkel is expected to retain her position, although the composition of her ruling coalition remains uncertain. However, many issues pertaining to Germany and its role in Europe, the eurozone and the world remain open questions.

Fellow Doug Elliott writes what we know and don’t know about the outcome and consequences. What we know:

• Merkel will remain in charge
• There will be no popular mandate to renounce Europe
• Germany will continue to resist external pressures to increase domestic spending [see below for analysis of Germany’s excess national savings], reduce its trade surplus, and allow inflation to move up

“A new German government may move a bit in those directions, but not very far,” Elliott writes, adding:

The German public, and most of the politicians, believe strongly in: fiscal austerity (which reduces the ability to stimulate consumer spending); big trade surpluses; and inflation as close to zero as they can manage. These are articles of faith in Germany and politicians are simply not going to stray too far from them.

What we don’t know, he says, includes whether Merkel will have to form a “grand coalition” and whether she, as chancellor, would have any additional flexibility in dealing with crises in the eurozone.

Kemal Derviş, vice president and director for Global Economy and Development, examines potential post-election scenarios for Merkel and Germany and their impact on issues facing the European Union. Focusing on the potential outcomes for whichever coalition emerges, 

The German election will not produce a political earthquake and will not suddenly open the door to a federal Europe on the model of the United States, with large implicit fiscal transfers and highly centralized defense and foreign policies. But, at a minimum, the outcome is likely to speed up implementation of eurozone decisions that have already been made, leading to somewhat more expansionary economic policies in both Germany and the eurozone.

Earlier in September, Fiona Hill, director of the Brookings Center on the United States and Europe, moderated a panel discussion on the consequences for Germany and its leadership role in the EU. The panel included two members of the German Parliament, from two different political parties. The discussion ranged from Syria, to Afghanistan, to Germany’s finances, to the eurozone issues. A complete transcript and audio recording are available.

Finally, in a paper for the annual Think Tank 20 report on the G-20, which focused on central banks and unconventional monetary policy, Daniel Gros, director of the Centre for European Policy Studies in Brussels, explored the implications to the European and global economies of Germany’s characteristic of excess national savings, which may have a tendency to depress domestic investment. As the periphery of the eurozone contracts, Gros writes:

It would thus appear to be in Germany’s best interest that the rest of the eurozone does not become too Germanic in its savings habits. As for the rest of the world, Germany can only hope that stimulus abroad works so that foreigners can continue to buy German goods and services and hopefully service the debt accumulated in the meantime.

Get all Brookings research and commentary on Germany and the eurozone crisis.