September 25, 2017 / 11:07 AM / 23 days ago

Breakingviews - Diminished Merkel will choke ambitious euro reform

Germany's Chancellor Angela Merkel arrives at the European Union council headquarters for an EU leaders summit discussing the EU's long-term budget in Brussels November 23, 2012. REUTERS/Francois Lenoir

FRANKFURT (Reuters Breakingviews) - Euro zone reform was barely addressed in the run-up to the German election on Sunday. Yet Europe’s ambition to strengthen the foundations of the single currency may be the most high-profile victim of the vote in its biggest economy.  

Chancellor Angela Merkel’s Christian Democratic Party has suffered its worst post-war electoral showing and will probably have to govern in coalition with the Free Democrats (FDP) - who reject closer euro zone fiscal ties and want to kick Greece out of single currency - and the Greens. Her diminished Bavarian sister party, the Christian Democratic Union, is likely to strike a more stridently eurosceptic tone before a state election in Bavaria in 2018. And the right-wing Alternative for Germany (AfG) wants to pull Germany out of the euro.  

While a spat means that the AfG co-leader, Frauke Petry, now won’t join its parliamentary group, the right-wing party is nevertheless the third-largest force in the lower house of parliament and has plenty of scope to make trouble for Merkel. Swapping the Social Democrats for new coalition partners will also pose challenges. 

The Greens are pro-European and won’t quibble about deeper fiscal integration in the euro zone. But FDP party boss Christian Lindner campaigned as the champion of Teutonic fiscal discipline and vowed to resist any plans for a euro zone budget or a true banking union. He said as recently as Sunday that any euro zone finance minister’s key job should be to enforce existing fiscal rules rather than oversee automatic fiscal transfers between members of the euro.  

Merkel needs approval from the lower house of parliament before Germany can make financial transfers to another euro zone country. True, her erstwhile coalition partners, the Social Democrats, could provide her with the necessary votes. But any attempt to force through deeper euro zone fiscal integration might prompt the FDP to withdraw from a coalition government. Such domestic political constraints mean that preserving the euro’s status quo is the best Europe can expect from Merkel over the next four years.

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