The Corner

A Useful Alternative

Germany’s political establishment may be willing to preside over the hollowing-out of the country’s democracy, and, in time, the institutionalized looting of its taxpayers, but there are signs that German voters are increasingly prepared to look at another option, the Alternative für Deutschland, the upstart party that came impressively close (it secured 4.7%, just short of the 5% threshold) to being elected to the German parliament in the 2013 general election. That was not a bad achievement for a party then less than a year old. Months later the AfD entered the European Parliament with over 7 percent of the vote and it is now beginning to make inroads at the state level, winning representation in a series of elections in the former East German Länder of Saxony (9.7 percent), Thuringia (10.6 percent) and Brandenburg (12.2 percent).

The party was initially based on its opposition to the single currency (the AfD is anti-euro, not anti-EU), but its message has broadened to include themes that are more traditionally conservative, populist or both.

The Guardian (no fan of the AfD) notes:

The priority for the AfD is to establish itself in the west. Elections are due next year in prosperous Hamburg in February, then impoverished Bremen in May. If the AfD does well then its chances of gaining parliamentary seats in 2017 look good. As Merkel noted before these elections, the AfD is a problem for all parties…

And that’s where things start to get interesting. The AfD will not play a part in any national government any time soon, but fear of its vote-pulling power may start to drag some of the establishment parties in a more euroskeptic direction.  

Writing in the Daily Telegraph, Ambrose Evans-Pritchard:

Standard & Poor’s has issued an extraordinary credit alert on the eurozone, one that deserves close attention. It warns that the rise of Germany’s AfD anti-euro party calls into question the euro bail-out machinery and queries the pitch for any form of QE, stimulus that has already been pocketed and spent in advance by the markets.

It will force Angela Merkel to take a tougher line on Europe, and further complicates the management of the (already dysfunctional) currency bloc.

If that turns out to be the case it will be excellent news. The more that management is “complicated” the greater the (still sadly remote) chances that enough eurozone politicians of enough heft will be prepared to act on the reality that the preservation of the single currency in its current form is not the cure for Europe’s economic woes, but the best guarantor that they will continue.      

Back to Evans-Pritchard:

The rating agency said it will henceforth monitor any sign that Germany is digging in its heels on EMU matters as it seeks to head off this rising political threat. The report is written by Moritz Kraemer, head of sovereign ratings in Europe. He is German. This is not an Anglo-Saxon analysis….

And, as Evans-Pritchard reports, the AfD is making use of its seats in the European Parliament:

We saw potent effects of that  [presence] yesterday as party leader Bernd Lucke personally grilled the ECB’s Mario Draghi at a session of the economic and monetary affairs committee.

He specifically attacked ECB plans for asset purchases, insisting that there is already more than enough liquidity in the financial system to head off deflation. QE-lite is merely a way to shift credit risk from the high-debt states to the creditor core (a quasi fiscal policy that circumvents the sovereign prerogatives of the Bundestag), he said, and it will not work anyway. “You are saddling up the wrong horse because you don’t have another one in the stable,” he said.

Mr Lucke is a professor of economics at Hamburg University, a specialist on the real business cycle model. His right-hand man is Hans-Olaf Henkel, former head of the Federation of German Industry and a financial columnist for Handelsblatt. These are serious men. Attempts to dismiss them as fringe romantics, and lately far-Right rabble-rousers, are unlikely to work. AfD has for the first time given disaffected Germans a way to protest without stigma.


Should AfD’s popularity persist in the polls, we would expect [Merkel’s] CDU to attempt to reoccupy the political space it had previously abandoned. Accordingly, we would envisage a rising probability of the CDU’s (and hence Germany’s) policy stance hardening toward euro area compromises. This could include less flexibility in easing the pace of fiscal adjustment of other European sovereigns, or resistance toward a coordinated pan-European investment plan that some European governments are aiming for. It could also lead to more openly critical rhetoric against the ECB’s policies, which would further complicate unconventional monetary policy.

None of this would matter much, if we were to assess that the euro crisis is safely behind us. However, this is unlikely to be the case. Eurozone output is still below 2007 levels and in 2014 the weak recovery has come to a near halt in much of the euro area. Unemployment remains precariously high and disinflationary pressures have been mounting. Public debt burdens continue to rise in all large euro area countries bar Germany.

We will monitor any signs of Germany hardening its stance. Such a shift could diminish the confidence of financial investors in the robustness of multilateral support upon which any eurozone sovereign could draw, should it be required. Such a change in sentiment could contribute toward less benign sovereign funding conditions for lower-rated euro area sovereigns compared to the historically low interest rates on sovereign bonds that we observe today.

That “change in sentiment” is still a long way off. If investors have learned anything in recent years it is that there are almost no lengths to which the euro zone’s leaders will not go in their efforts to keep their hideously destructive monetary experiment going, but the fact that that task may have got just a little bit more difficult is nothing to regret.  


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