Angela Merkel loosens purse strings, embraces Europe to strike coalition deal

To secure a fourth term as chancellor, Angela Merkel is handing her Social Democrat (SPD) coalition partners control of the Finance Ministry, giving them licence to spend a record budget surplus, and embracing their demands for European reform.

Merkel's conservatives and Germany's main centre-left party reached an agreement to form a new coalition government after a final session of negotiations that dragged on for 24 hours.

Giving up the powerful ministry to the centre-left SPD is a particularly strong signal to Germany's eurozone partners, many of whom endured austerity championed by Wolfgang Schaeuble, finance minister in the previous government.

"Symbolically, it is quite big," said Carsten Nickel, managing director at consultancy Teneo Intelligence.

"The language will be different and I think the language can make a difference, specifically in France — but substance, I 
think, is still a different conversation."

SPD Leader Martin Schulz has styled the coalition agreement on Europe as "an end of forced austerity" — a pitch designed to appeal to his party's 464,000 members before they vote on the deal and decide on their third grand coalition with Merkel since 2005.

While the deal still stresses Germany's commitment to the EU's strict budget rules, it also calls for the eurozone's ESM bailout fund to be turned into a full-blown European Monetary Fund, and for funding to shield the eurozone from crises. Schulz said the prospective fund would become a significant instrument for EU financing.

The agreement was welcomed by senior EU officials, who will also greet the prospect of Germany using the fruits of its robust economic growth to increase domestic government spending — a move other EU capitals have long called for.

Key ministries may go to SPD 

by CBC Europe Correspondent Margaret Evans 

In addition to finance, media reports suggest that the SPD will hold several key ministries including foreign, labour, justice and the environment.

Schulz himself is said to be in line for the role of foreign minister, with Hamburg Mayor Olaf Scholz tipped as the new finance minister.

But whether that will be enough to convince rank and file members of the SPD that another coalition with Merkel is a good idea is not a given.

They'll have to approve the agreement in a postal vote to be held in the coming days.

"There is a strong view [among Social Democrats] that the grand coalition is a sure path for the SPD into oblivion," says Josef Janning of the European Council on Foreign Relations in Berlin.

"And that leads people to say we need an entirely new start, an entirely new way to organize politics."

Members of the SPD's youth wing in particular are opposed to a coalition campaigning against it on social media using the slogan #NoGroKo: No Grand Coalition.

"They will mobilize against this," says Janning. "And they will also likely use the fact that Martin Schulz seems decided to take a cabinet post as foreign minister and so they will denounce this coalition-building as being driven by interest in positions and red carpets and limousines."

Spending splurge

According to a draft of the coalition agreement seen by Reuters on Wednesday, the next government sees additional fiscal space of 46 billion euros ($71 billion Cdn) over the next four years to increase investments and reduce taxes as Germany's strong economic upswing pushes up revenues and the budget surplus.

Still, a splurge as planned in the coalition draft would have been harder to imagine with a Finance Ministry under Schaeuble, renowned for his laser-like focus on budgetary rigour.

"Do not underestimate the impact of the SPD getting the influential finance ministry," said Commerzbank chief economist Joerg Kraemer.

"This marks a huge change from the policy of Wolfgang Schaeuble regarding European integration, transfer of risks towards the peripheral countries."

Schulz said the key point was that the government was prepared to put more into the EU budget.

The next finance minister is likely to be Hamburg Mayor Olaf Scholz, a down-to-earth figure and keen advocate of European integration who has been critical of Merkel's eurozone policy in the past.

'Opinions in the Bundestag, if anything, have become more skeptical on Europe.'- Guntram Wolff, director of the Bruegel think-tank

Even though the coalition deal takes a markedly positive tone on Europe, there may be more scepticism in the lower house of parliament, the Bundestag, which ultimately controls fiscal and eurozone policy.

Guntram Wolff, director of the Bruegel think-tank, said the coalition deal was "not a game-changer."

"Opinions in the Bundestag, if anything, have become more skeptical on Europe and the majority [the coalition parties] have now is much smaller," he added.

Fiscal angst

The far-right Alternative for Germany (AfD), which surged into parliament in the Sept. 24 election with almost 13 per cent of the vote, opposes eurozone rescues and spending by the ESM.

Some conservatives in Merkel's bloc also fear that rushing ahead with European integration would cost German taxpayers dear. Former European Central Bank chief economist Otmar Issing called the coalition blueprint "a farewell to the idea of an EU aimed at stability."

That fiscal angst in Merkel's bloc risks feeding tensions between the coalition partners, who only renewed the alliance they embarked on in 2013 after she failed to form a government with two smaller parties after September's national election.