Brexit Will Speed Up Once Merkel Has Won

Last weekend, Angela Merkel debated her opposite number Martin Schulz on television, ahead of this month’s election. What was billed as a ‘duel’ between the German Chancellor and her Social Democrat challenger, was actually more of a ‘tea dance’.

Largely agreeing with Merkel throughout, Schulz made little impact. With a fortnight to go until the 24 September election, it’s now almost certain the Christian Democrats will prevail. Having led her party since 2000, and Europe’s largest economy since 2005, Merkel is set to win another term.

The big question now is who’ll govern with her. The CDU might join invite their traditional allies, the liberal Free Democrats, if FDP can win enough votes to cross the 5pc threshold and re-enter Parliament. If not, we could well see a ‘grand coalition’ of the CDU and SPD – which might explain why Schulz was so emollient.

What’s clear is that Alternative für Deutschland (AfD) is on the cusp of entering Parliament. Founded only in 2013, the anti-EU AfD, which wants Germany to leave the euro, already sits in thirteen of Germany’s sixteen regional Parliaments. AfD is about to become the first party to enter the Bundestag on a platform to the right of the CDU in over sixty years – a fact likely to dominate Germany’s post-election headlines.

AfD could end up with 50 seats. All the ‘establishment’ parties have vowed not to allow this populist upstart into any coalition – a fact that could boost AfD’s support. Millions of German voters are outraged by high refugee numbers and bailout payments associated with the broader ‘European project’.

Michel Barnier complained last week that the UK has so far made ‘little or no progress’ during the Article 50 talks. The EU’s Chief Negotiator seems now to be in competition with European Commission President Jean-Claude Juncker, with both men taking it upon themselves to throw personal insults at senior members of the British government.

The reality is that the UK will conduct these Article 50 talks not with Juncker, or even Barnier, but with Merkel and the German government. Progress has so far been limited because Barnier has little authority – and is anyway determined the talks fail. Once these German elections are over, negotiations will begin in earnest.

Getting on for 10pc of German exports are sold in Britain. Germany’s UK trade surplus exceeds £20 billion. Merkel has repeatedly said she wants a ‘good agreement’ with Britain and that talks ‘should not get nasty’. The head of Bundesverband der Deutschen Industrie, Germany’s main employers’ group, has said it would be ‘very, very foolish to erect trade barriers against Britain’. The BDI represents thirty-seven sector associations and 100,000 companies, employing one in five German workers.

Of course it would be foolish. UK exports to Germany support around 750,000 British jobs, with around 1.3 million German jobs dependent upon exports to the UK. Once these German elections are over, I hope and expect these Article 50 talks to get serious.

I’d also suggest that Berlin cares a lot more about getting down to brass tacks on a decent UK-EU trade deal that about holding London’s feet to the fire over the precise size of Britain’s ‘divorce bill’ contribution to the already grotesquely inflated Brussels bureaucracy.

Barnier will remain involved in the talks, of course – useful as a front man, not least to temper sensitivities by disguising the reality that the Germans are really in charge. But as Berlin engages, with Barnier’s influence waning and Juncker warned to behave, I expect the tone of these UK-EU discussions to improve over the coming months. That’s just as well, seeing this autumn’s Brexit shenanigans at Westminster will clearly be very testy indeed.

The shadow of a newly-empowered German Chancellor looms large not only over the European Commission, but also the European Central Bank. Mario Draghi last week announced no headline changes to the ECB’s deposit rate, which stays negative at -0.40pc, with the main refinancing rate held at zero. Crucially, the ECB President soothed financial markets by pledging to continue ‘quantitative easing’ at a pace of €60bn (£55bn) per month.

The eurozone’s central bank’s balance sheet is now bigger, as a share of GDP, than that of both the Bank of England and the Federal Reserve. Having vowed in 2012 to do ‘whatever it takes’ to stop the eurozone from falling to bits, ‘Super Mario’ remains the toast of traders everywhere.

Draghi hinted, though, that Euro-QE could soon be ‘tapered’, or gradually withdrawn. The ECB is now widely expected to announce a ‘decision to taper’, rather than actually starting to print less, in October. I’m not so sure.

Draghi is clearly under rhetorical pressure to cork his monetary bazooka. With the eurozone forecast to grow by 2.2pc in 2017, a 10-year high, he can hardly claim recession is imminent. Germany’s mighty banking sector is also complaining loudly about negative rates, while positioning itself for when this QE-driven asset price pyramid finally collapses. ECB money-printing is ‘now causing ever greater upheavals,’ said Deutsche Bank supremo John Cryan last week

Much of the German political elite also detests QE. Germany’s army of savers are sick of ultra-low interest rates. Wolfgang Schäuble, Germany’s highly-respected finance Minister, has blamed QE for the rise of AfD and says it will ‘ultimately end in disaster’. The reality is though, that QE is now the glue holding the eurozone together.

Of course, Draghi needs to say he’ll taper QE ahead of these German elections – because that’s what Merkel needs him to say to assuage her electorate. But with the eurozone’s powder-keg bond markets and banking sector dependent on the ECB-drip-feed, once the election is over, I doubt she’ll force him to actually do it.

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