Seismic shifts continue to reverberate through Europe’s political landscape. After the landmark victory of Grillo’s Five Star Movement (M5S) at Italy’s general election in February, winning a quarter of the votes and leaving the country paralysed, the last weekend saw Germany’s new anti-euro party, the AfD (Alternative für Deutschland), proclaiming its intention to run in the country’s crucial elections in September.
As in Italy, the emergence of this party should be taken serious. Angered by the risk of future losses on Germany’s bilateral loans to Greece, its guarantees to the EFSF/ESM and the Bundesbank’s TARGET2 liabilities, together worth more than 30% of GDP, the founders of the AfD demand the orderly break-up of the euro, a restructuring of unsustainable debt in the periphery and the cancellation of the ECB's OMT programme.
Contrary to the M5S, however, the AfD’s main leader, Bernd Lucke, is not a populist comedian, but an even-tempered 50-year old economics professor at the University of Hamburg. Lucke is also founder and chairman of the “Plenum of Economists”, a German initiative formed in 2010 to challenge the creation of the euro area’s permanent bailout fund, the ESM. In July last year, 329 German economic professors, among them two of Germany’s current so-called ‘five wise men’, signed the founding declaration of this initiative, which resembles many of the AfD’s main economic demands.
But the AfD is not ostensibly a right-wing party nor is it a catchment basin for nationalists. It would like to reform Germany’s immigration policy along the lines of the Canadian system, with an emphasis on attracting high-skilled foreign workers, while also wanting to ease the country’s asylum policy. And while the AfD’s key objective is the abolition of the euro, it does not necessarily want to return to Germany’s former currency, the D-Mark. Smaller and more homogeneous currency areas – say covering Germany, Austria and the Netherlands – are on the AfD’s agenda.
The AfD’s manifesto, however, remains vague about how it could possibly break up the euro without forcing Europe into financial havoc and extremely deep recession. This is – rightly so – the main criticism that the party currently faces in Germany. Parallel domestic currencies – similar to the introduction of the euro – with initially fixed exchange rates, which would subsequently be adjusted to reflect differences in economic strength, seem to be one of the options considered by Lucke and his academic peers. But with German banks’ assets in other euro area member states worth 33% of German GDP, and with 40% of total exports going into the single currency union, even a gradual appreciation of the D-Mark – which might be difficult to engineer in practice – would likely cause banks to collapse, corporates to default and unemployment to soar.
So, in the absence of a clearly-defined and credible exit strategy, and unless tangible fears over an imminent Italian and/or Spanish sovereign default were to emerge this summer, fuelling concerns among German voters of far more unpopular and costly bailouts, the AfD is unlikely to score highly at September’s elections. Indeed, first polls this week predicted a share of just 3% of the vote for the AfD, insufficient to pass the 5% hurdle necessary to enter the German parliament. And despite other polls suggesting that about one quarter of German voters could imagine themselves casting their ballot for the AfD, with unemployment at record low levels, and more than three million jobs directly dependant on exports to the euro area, German voters are unlikely, in our view, to put their faith in the hands of the new anti-euro party.
Perversely, however, even if the AfD fails to enter parliament, it has the potential to tip the scales of power in Germany towards a more europhile government. While the AfD is likely to attract support from both left and right, recent membership statistics suggest that Merkel's CDU and her junior coalition partner, the FDP, are likely to be the main losers of votes to the new party. And with Merkel’s junior coalition partner, the FDP, struggling to reach the critical 5% hurdle – out of the six main polls two see them at 4%, three at 5%, and one at 6% – even a 3% result for the AfD might well erode the position of the current ruling parties and pave the way for a Grand Coalition between Merkel's CDU and the Social Democrats, the SPD.
By helping to install the SPD into office by the back door, however, things would likely turn from bad to worse in the eyes of the AfD. In its election manifesto, the SPD calls for the establishment of a European redemption fund, which foresees joint and several guarantees on all outstanding euro area government debt in excess of 60% of national GDP. Such a common debt vehicle would grant stressed member states access to cheaper financing for several years, while requiring them to set aside special tax provisions and collateral to service and guarantee the debt.
This would undoubtedly be positive news for the euro area. Indeed, implementation risks aside, we have long seen attractions in such a fund, which remains, in our view, one of the only tools capable of ensuring debt sustainability in the periphery. While the ECB’s OMT programme currently provides powerful insurance for stressed member states at times of liquidity shortages, it would lose much of its appeal if investors were to question more seriously the sustainability of Italy’s and Spain’s growing debt mountain amid continued economic weakness.
So, the rise of Germany’s new anti-euro party need not be bad news for the euro. Our hopes are that an AfD-induced Grand Coalition might prompt new impetus for deeper economic and fiscal integration in the euro area, not least as it might help to revive the stricken Franco-German relationship. Through its stubborn insistence on front-loaded fiscal consolidation, its resistance to joint liabilities, even if limited in time and amount, and its hesitation in putting in place the much-needed banking union, Merkel’s centre-right government has jeopardised the long-term survival of the euro. Ironically, Lucke’s anti-euro party might help to deepen ties within continental Europe once again.
Tobias S. Blattner
Euro area Economist