Life After Merkel: The upcoming German regional elections

After a long four terms in government, Angela Merkel is stepping down as Chancellor. The physical embodiment of stability, Merkel has built herself a successful persona of national and international renown. But all good things must come to an end (although no doubt we’ll all be reading her biography in a couple of years), and someone must take her place. The CDU have nevertheless managed to find the Chancellor’s reincarnation in its new leader, Armin Laschet. Once an MEP and journalist, Laschet is now on the brink of becoming one of the most powerful politicians in the EU.

But he’s not there yet. Inside the CDU’s sister party the CSU, the looming figure of Markus Söder hangs over him. Despite having repeatedly claimed that his “job [as leader of the CSU] is in Bavaria”[1], half of Germans consider him a suitable candidate for chancellor.[2] 65 percent of CDU/CSU supporters consider Laschet unsuitable as a candidate for chancellor (7% said they were “definitely” in favour of the new CDU boss while 11% were “more or less” so).[3] Söder, however, receives the greatest approval with a total of 79%. His challenge comes from fundamental distrust in the CSU to successfully secure the Chancellorship; two CSU politicians have been nominated as the CDU-CSU candidate in the past, but neither won the big national prize.

Then, of course, Mr Laschet has to worry about the other parties. The SPD has already nominated Olaf Scholz, the finance minister, whose ruthless blaming of the CDU for the vaccination program has signalled the fight to come. In a recent survey, Scholz was the third most popular minister after Merkel and Söder. Laschet, on the other hand, came in at a measly 7th place.[4]

Still, Laschet has a chance to prove himself as a worthy successor. On 14th March, two regional elections will take place, both of which will be vital in judging his success at the head of the CDU. One is in Baden-Württemberg and the other is in Rhineland-Palatinate.

Baden-Württemberg is the more significant. As the third largest state in Germany, the result will be a strong indicator of how each party is doing on a national level. In the last regional election the Greens stormed to victory, for the first time becoming the largest party in any German state. They pushed the CDU into second place.

Rhineland-Palatinate is currently controlled by the SDP, FDP, and the Greens. At the last election in 2016, the Greens lost a significant chunk of their support, letting the FDP into the ruling coalition.

If the CDU can translate their national poll lead into gains in these elections, then the more likely that Laschet can be sure he will be put forward as Chancellor Candidate. The less successful he is, the more likely Söder will be the CDU/CSU’s nominee.

In a recent INSA poll, the Greens are on around 31% of the vote in Baden-Württemberg, the CDU 28% (a 1% increase from 2016), the AfD and SPD on 11% each and the FDP on 10%. Meanwhile, the SPD and CDU are neck and neck in Rhineland-Palatine at 30% and 31% respectively, with the Greens trailing behind at 12%[5]. Here, the CDU has dropped its vote share by 0.8%, but has narrowed the gap with the SPD, who won 36.2% in 2016.

These numbers are neither good nor bad for Laschet. If the result is in line with these polls then he’s not done well enough to be confident of a huge groundswell of support in the September national election. But nor will it be bad enough for the party to replace him. He is exactly the safe pair of hands that he was expected to be when the CDU made him their leader.

On a national level, the initial boost for Merkel on her handling of the pandemic last year has ebbed away although the CDU is still ahead of the polls at 32.5%. The question is who will they govern with? It’s up for grabs with the SPD and the Greens both at 17%, and the FDP at 10%. One certainty is that nobody will rule with the increasingly toxic right-wing AfD at 11%[6].

One politician who is supportive of Laschet’s potential to be chancellor is FDP leader Christian Lindner.[7] With Laschet – who currently governs North-Rhine Westphalia with the FDP – as CDU/CSU Chancellor candidate, this combination could be carried into the federal government. If Söder were to come out victorious, Germany is more likely to find itself in a CDU-Green coalition; the CSU leader has spent much of this year attempting to tighten relationships with the party.

Either way, the Merkel era is over. That is going to leave a leadership vacuum in Europe at precisely the time that it is facing not a significant economic crisis. The Recovery Fund is a huge step forward for the institutions of the EU – but it needs strong and consistent leadership to ensure the bloc doesn’t take a huge step back. Even if Laschet does become Chancellor, he is unlikely to be able to meet the challenge ahead.

[1] https://www.bild.de/politik/inland/politik-inland/markus-soeder-im-interview-jetzt-ist-nicht-die-zeit-fuer-lockerungen-72168988.bild.html

[2] https://www.spiegel.de/politik/deutschland/armin-laschet-markus-soeder-und-die-kanzlerfrage-umfrage-zeigt-klare-vorteile-fuer-soeder-a-cf352340-9dd9-4371-9dd4-7ab06ab7da9f

[3] https://www.spiegel.de/politik/deutschland/armin-laschet-markus-soeder-und-die-kanzlerfrage-umfrage-zeigt-klare-vorteile-fuer-soeder-a-cf352340-9dd9-4371-9dd4-7ab06ab7da9f

[4] https://de.statista.com/statistik/daten/studie/1817/umfrage/noten-fuer-spitzenpolitiker/

[5] http://infratest-dimap.de/umfragen-analysen/bundeslaender/rheinland-pfalz/laendertrend/2021/februar/

[6] https://www.wahlrecht.de/umfragen/insa.htm

[7] https://www.spiegel.de/politik/deutschland/fdp-chef-christian-lindner-ueber-armin-laschet-cdu-laschet-kann-kanzler-a-20455c33-1e47-4bfa-8a22-6c851197f043

 

Can Super Mario do Whatever it Takes to Save Italy?

Italian politics has been nothing short of a soap opera. Take the formation of a new government in the middle of a pandemic, for just one example. Mario Draghi’s appointment following Conte’s confidence vote success was an unexpected plot twist in the already unpredictable storyline.

Now, of course, we’re all going to try and predict what happens next in the world of Italian politics. It’s a bit like betting on which Game of Thrones character is going to die next: someone will die, but try to guess who and how, and you’ll probably be wrong.

Still, Mr Draghi’s precedent as ECB President offers some signals as to what might be coming Italy’s way.  He has cultivated a well-respected public persona, having been credited for saving the euro following the 2011-12 sovereign debt crisis. La Repubblica (an Italian newspaper) found Draghi beat former prime minister Giuseppe Conte in all categories (see chart below) and 85% were “very or fairly” pleased with his appointment.[1]

Mario Draghi is a more popular figure than his rivals.

Source: La Repubblica (12 Feburary 2021)

His support doesn’t stop with the public; Italia Viva, Matteo Renzi’s party, firmly pledged its support early on in the process. The Democratic Party too agreed to work with Draghi (although, having strongly aligned with Conte, it may have been more of a truce). Nicola Zingaretti, its secretary, stated that “the united Democratic Party is on the field and ready to support this new challenge”[2]. Even Matteo Salvini, leader of the League, has pledged his support and willingness to “put aside ideology, prejudice, and arguments and get to work.”[3]

The only party to take an anti-Draghi stance is Fratelli d’Italia. They likely spot an opportunity to take the mantle of the only anti-establishment party now that the League and the 5 Star Movement have backed Super Mario. The cracks are already starting to appear for those parties, with the 5 Star Movement having a bit of an existential crisis at the moment (aren’t we all?). Their conundrum comes from the dilemma of backing Draghi – the establishment incarnate – or backing a crisis. 59.3% of party members might have voted to support the new executive, but a hefty 40.7% voted no.[4] Internally, the party is fractious.

Salvini is more willing to play along because he has his ulterior motives: a say in the Recovery Fund, and influence over the probability of an election. The League is at the top of the polls, and an election in the near future would be politically advantageous for Salvini. Draghi’s is the 7th government in a decade and survival for another two years with no election will be difficult.

In uniting opposing parties such as the League and the Democratic Party, Draghi has spread his unity government so broadly across the political spectrum that even his Super Mario reputation might not save him. How to navigate the reforms – ranging from the long-awaited judicial reforms to make civil trials shorter to a green economy transition[5] – that Brussels are expecting with such an eclectic array of ideologies, some of which directly clash? The new prime minister’s policies will be directed through an extremely narrow tunnel of what these parties are able to agree on.

And time is offering little mercy. Unemployment rose in December, reaching 9%. Among young people aged 15 to 24, it reached 29.7%.[6] In 2020, the number of Italians needing help to buy food rose by more than one million according to the farmers’ association Coldiretti. Tackling this is going to take not just vast fiscal stimulus, but also a level of political stability that Italy hasn’t seen in years – and in the midst of a pandemic. Draghi might support a “very strict regulation (of the markets) and a welfare state that offers protection to those caught out” [7], but the “whatever it takes” philosophy can only make a comeback with the support of parliament. Italian politics is infamous for its fickle nature, and it is inevitable that allegiances will change. Draghi’s challenge is to minimize this.

Many are optimistic of his role in both Italy and the EU. There is good reason for that; his ministerial appointments have focused on expertise and competence. The finance minister is in the safe hands of the deputy governor of the Bank of Italy, while the former head of the constitutional court, Marta Cartabia, has been given the position of justice minister.

But the huge amount of political instability that Draghi faces must not be understated. This is Italy and the drama is far from over.

[1] https://www.repubblica.it/politica/2021/02/12/news/draghi-renzi-sondaggio-piepoli-287178947/

[2] https://www.agi.it/vista-tv/video/2021-02-12/governo-draghi-zingaretti-pd-unito-pronto-sostenere-sfida-11378394/

[3] https://www.7colli.it/salvini-spiega-il-si-a-draghi-ci-sono-da-spendere-200-miliardi-voglio-esserci-video-30759/

[4] https://www.repubblica.it/politica/2021/02/12/news/governo-draghi-quirinale-_ministri-287181374/

[5] https://time.com/5938818/italy-mario-draghi-leading/

[6] https://www.istat.it/en/archivio/253024

[7] https://www.france24.com/en/live-news/20210209-how-long-with-italy-s-honeymoon-with-draghi-last

Does Boris mean bad news for cable?

Forex

The UK is less than a day away from finding out who the next Prime Minister will be. The winner of the Tory leadership contest will lead the UK in its exit from the EU later this year, and Boris – who has refused to rule out closing Parliament to secure a no-deal Brexit – is favourite to win.

Cable is unsurprisingly jumpy on the topic of Brexit, and it pushed higher last week when MPs made it harder for the future PM to force through a no-deal Brexit by suspending Parliament.

The new bill states that even if Parliament is suspended, it must sit for a few days in September and October to consider issues in Northern Ireland. It also requires ministers to make reports every fortnight on progress towards re-establishing Northern Ireland’s collapsed, devolved executive and to give lawmakers an opportunity to debate and approve those reports.

While the legislation would not prevent a Parliament being suspended, it would make it harder to sidestep lawmakers.

Already Decided?

A poll of Tory members suggested that Boris has two-thirds of the vote. More than half of those who voted Conservative in the last general election would vote for Boris, compared to just 27% for Hunt. Voting is currently taking place and closes at 5pm today, with the winner expected to be announced tomorrow.

However, Boris is the firm favourite to win and, barring something spectacular, will take over the reins as Prime Minister on Wednesday. So, while markets are likely to react to the news, it’s likely that much of the turbulence has already been factored in.

What to expect

The pound is already weaker, with cable losing about 50 pips today in morning trading.

Concerns about Brexit – and, therefore, the leadership contest – continue to drag the currency down. GBP/USD had started the session north of 1.25 but was last making new lows around 1.2460. It’s likely that if hard-brexiteer Boris is announced as the next PM, sterling will take a knock.

However, leading thinktank National Institute for Social and Economic Research (NIESR) has warned that the dampening impact of Brexit over the last three years could have dragged the UK into recession already.

Overall, the think tank sees a 30% chance Sterling will decline over the course of 2020, and that probability will be higher if Britain crashes out of the EU.

Even if a no-deal Brexit is avoided, NIESR predicts the economy will grow just 1.2% this year and 1.1% next year as uncertainty about Britain’s future trading relationship with the bloc will hold back investment and slow growth.

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