Germany: Political drama over? – Deutsche Bank

Analysts at Deutsche Bank suggest that the German political drama was the main story in Europe yesterday where Chancellor Merkel was forced into considering concessions to stave off a potential political crisis.

Key Quotes

“As a reminder all this centres around the migrant debate with Interior Minister Horst Seehofer, who is head of Bavaria’s Christian Social Union party (one-third of the coalition), insisting that Merkel reaches a deal by the end of this month with EU governments to negotiate the return of migrants to countries where they were first registered, or else begin turning migrants away from the German border. Merkel agreed to the timeframe (if not committing to a solution) and announced that she will report back on July 1st. As a reminder the EU summit is scheduled for June 28th and 29th.”

“Our economists in Germany highlighted in their note yesterday that the setting up of such controls by Seehofer would leave Merkel with only two options, either she would go along with Mr. Seehofer’s more restrictive policy approach – a loss of face she might not survive for very long – or she would have to sack him which would almost certainly cause the CSU to leave the coalition and ultimately result in a collapse of the Groko.”

“Our colleagues consider the latter option very unlikely and see a further muddling through with no clear winner but a substantially damaged Merkel as the most likely outcome. Therefore, they expect this conflict to linger around up until the Bavarian elections on October 14, unless polls provide insights that this approach will not improve the CSU’s election chances.”

“They also add that while yesterday’s compromise buys time for Merkel and her European approach, the German government crisis has weakened her role on the EU and international stage, in particular. Her room for manoeuvre in this question will remain constrained. This will also have repercussions for Merkel’s ability to move forward on euro area reforms as both CDU and CSU are reluctant to back proposals on budget lines for investment and/ or support in case of asymmetric shocks for individual member states.”