After a long, initially-successful run promoting European integration and mass immigration, German Chancellor Angela Merkel saw the bottom fall out of her political fortunes this year. This morning she stepped down as leader of the formerly-dominant Christian Democrat party and promised not run again when her term as Chancellor ends in 2021.
What happens next is almost certain to be chaotic, as the following chart (courtesy of this morning’s Wall Street Journal) makes clear:
Note that in August of 2017 the two least popular parties were the far right Alternative for Germany (blue line) and the far left Greens (green line). In the ensuing 14 or so months AfG’s support rose from single digits to around 17% while the Greens rocketed from the bottom of the pack to 20%.
If you didn’t know what these two parties stood for you might think, “Fine, they’re new and interesting, so let them form a coalition and govern for a while.”
Unfortunately they’re more likely to kill each other in street fights than work together, since the former want closed borders and free markets while the latter want increased regulation and unlimited immigration.
The alternative to an AfG/Green coalition then becomes some combination of the remaining, more centrist (by European standards at least) parties. But the biggest of those parties – Merkel’s Christian Democrats and their coalition partner Social Democrats – are in freefall, precisely because of what they’ve done while in power.
So there appears to be no way to put these puzzle pieces together to produce a stable government.
And – here’s where things get truly scary – a stable Germany under Merkel’s bland but firm hand has been the only thing holding the European Union and eurozone together. If Germany descends into internal turmoil without a coherent government to push the Italys and Hungarys around, European populists/nationalists will fill the resulting vacuum. Borders will be re-imposed within and without the EU, national government budgets – already above EU deficit limits in many cases – will explode. Already-debilitating debts will keep rising, and the ECB will be forced to bail out Italy for sure and probably several other member states after that.
Since an ECB bailout of the Italian banking system means, in effect, moving Italy’s debt onto Germany’s balance sheet, the world’s one remaining rock-solid credit will join the ranks of politically unstable, increasingly indebted countries that may or may not be able to avoid financial collapse.
The end-game? A euro devaluation will be imposed by the global currency markets or announced preemptively on some future Sunday night by Merkel’s successor (assuming there is one).
The descent of the world’s second most important currency from reserve asset to modern day Italian lira will raise a lot of questions, including:
- Should we all buy the US dollar because it’s the only sound currency left?
- Should we dump dollars because the US is really not that different from Europe in terms of financial mismanagement and political incoherence?
- Should we dispense with the whole fiat currency thing and go back to sound money that requires politicians and central bankers to live within their means?
- Should we dispense with the whole “constitutional democracy” thing and hand over control to a leader who’s strong enough to put things right?
These four options seem about equally plausible at the moment. But the worlds they’ll create couldn’t be more different.
Other posts in the “Why We’re Ungovernable” series are here.