Booming Germany can weather political impasse — for now

The collapse of attempts by Merkel’s conservatives, the pro-business Free Democrats (FDP) and the left-leaning Greens to form a new government has plunged Europe’s powerhouse into turmoil, raising the prospect of snap polls.

But the markets kept their cool, with Europe’s blue-chip indices largely unmoved by the drama in the normally staid world of German politics.

Germany’s DAX index was up 0.1 percent by 1250 GMT, while the euro slipped by 0.1 percent against the greenback to $1.1785.

The breakdown of coalition talks was “not that surprising”, said the head of the DIW economic think tank Marcel Fratzscher, given the rifts between the parties on key issues such as migration, climate and eurozone reforms.

But there is no denying that the setback, which leaves Merkel fighting for her political life, is “a disappointment for the German economy”, said Eric Schweitzer, president of the DIHK chambers of industry and commerce.

“There’s a danger that work on important issues for the future of our country will now be delayed for a long time,” he said.

– ‘Future at risk’ –

The German economy has been enjoying a stellar growth streak, powered by brisk domestic and foreign demand, record-low unemployment and low interest rates.

The government last month sharply lifted its growth forecast for 2017 from 1.5 to 2.0 percent, with recent business and consumer confidence surveys adding to a picture of an economy in glowing health.

But economists have long warned that the momentum can only continue if the government takes the necessary steps to modernise a country with a rapidly ageing population and creaking infrastructure.

“The collapsed talks will probably have no impact in the short run,” said economist Carsten Brzeski of ING Diba bank, pointing to Belgium and the Netherlands as examples of caretaker governments not doing “any harm”.

“However, given the lack of structural reforms and the urgent need for investments in digitalisation and education, German politics should not waste too much time if they don’t want to put the economy’s future at risk,” he warned.

His comments echo those of Germany’s “wise men” council of economic advisors who this month urged the next government to take urgent action to future-proof the economy, notably by reducing the tax burden and cutting red tape.

– Macron left hanging –

With the country stuck in political limbo, reforms on the European stage may also have to take a back seat.

French President Emmanuel Macron has called for an ambitious overhaul of the bloc, but his push for a eurozone budget and finance minister was among the contentious issues dividing the coalition-seeking parties in Berlin.

Macron’s hopes for Merkel to join him as a co-pilot in the reforms drive will be on hold as her lame-duck government will be unable to take any bold policy actions at home or abroad.

With a minority government seen as an unlikely option, Germans are now bracing for a return to the polls as they navigate the unfamiliar territory of political uncertainty after 12 years of Merkel’s steady hand.

“New elections would imply political gambling in Germany over the next three, four months and a stalemate for Europe,” said Natixis economist Sylvain Broyer.