THE VIEW FROM MITTELEUROPA: German traffic light coalition could worsen frictions with CEE

THE VIEW FROM MITTELEUROPA: German traffic light coalition could worsen frictions with CEE
The coalition paper briefly mentions the need for Europe to ensure the diversification of its energy supply but the Greens are likely to abandon their opposition to Russia's Nord Stream 2 gas pipeline.
By Marcus How and Gunter Deuber in Vienna November 1, 2021

Suddenly, the odds on what was supposed to be the long shot have shortened considerably. On 21 October, the Social Democratic Party (SPD), Greens, and Free Democratic Party (FDP) said that they were planning to have the SPD’s Olaf Scholz confirmed as chancellor in the Bundestag by 6 December.

An Ampelkoalition (traffic light coalition) is thus looking increasingly likely. Yet the direction of foreign policy under such a government is less clear. The election campaign and the current negotiations have largely been dominated by domestic issues, such as tax, climate and social policy. Of the 10 chapters in the first joint coalition paper, only one is dedicated to foreign and European policy.

National elections are rarely fought on such issues. The Greens, FDP and, to a lesser extent, SPD variously advocate a greater geopolitical role for Germany. But there is little reason to expect greater dynamism from an Ampelkoalition. The focus on domestic policy suggests that approaches to “Europe and the world” will tread the well-worn path of previous German governments.

Indeed, while Germany has often underwhelmed its partners in its foreign policy concepts – for example by subordinating values-based approaches to trade – it has also been a major success economically. The abandonment of the principle of Wandel durch Handel (change through trade) would require an economic logic that does not currently exist.

Nevertheless, the devil is in the detail – and small differences can have an impact. In the context of Central, Eastern and Southeastern Europe (CESEE), there are several indicators that suggest modest change ahead. The salient areas concern the direction of EU integration, the rule of law, approaches towards Russia and EU enlargement.

Convergence through divergence?

The prospects of further integration at the EU level are of the most relevance for CESEE. The SDP and Greens are integrationist in their policy orientation. However, this is likely to be diluted significantly by the FDP, especially if it secures the finance ministry.

The FDP advocates restoring the constitutional debt brake as soon as possible. On the domestic level, a compromise will be possible through the shifting of debt-financed public investments from the primary budget to a bespoke agency. Large-scale spending by Germany – with the aim of making the 2020s “the decade of investments in the future” – will likely have positive spill-over effects for the rest of the EU, including the CESEE member states, many of which are key nodes in the German supply chain.

However, the entrenchment of spending infrastructure on the EU level is unlikely. The grants and loans enabled under the COVID-19 recovery package, Next Generation EU (NGEU), are unlikely to form the basis for either debt mutualisation or budgetary pooling. The Stability and Growth Pact (SGP) will remain a sacred cow, even if it becomes increasingly irrelevant. At most, the FDP would support the completion of the EU banking union through a common deposit insurance mechanism. But this should not be taken for granted either.

Reticence on fiscal integration does not really change the nature of the game for CESEE member states, which remain net beneficiaries of EU cohesion funds, even if most of them are experiencing a relative decline in the proportion of EU spending they receive under the current EU budget cycle.

Overall, the outlook for CESEE states is slightly negative from the EU perspective. An Ampelkoalition will likely approach other areas of EU policy in ways that might undermine some CESEE member states, both financially and strategically. In this respect, there is likely to be greater overlap with French President Emmanuel Macron – whose En Marche party is in the same European parliamentary group as the FDP – on questions of geopolitics, defence and the rule of law.

The rule of law: settling scores

The coalition paper spells out that the rule of law is “a central principle internally and externally,” and a key pillar of EU integration. This will have implications for member states deemed to be undermining the rule of law, namely – if not exclusively – Hungary and Poland.

With the departure of the CDU/CSU from government, there is scope for faster punitive action against Hungary and Poland. Outgoing Chancellor Angela Merkel did not exactly maintain cordial relations with leaders such as Hungary’s Viktor Orban. Rather than waste time with the federal government in Berlin, Orban increasingly went directly to where the money was and his network strong: states such as Bavaria, Baden-Württemberg and Hesse, where the automotive groups on which Hungary is so reliant are based.

But Merkel trod carefully, fearful of creating a two-tier EU. Furthermore, automotive groups such as Daimler, Opel, BMW and Audi are closely tied with the CDU/CSU, which are historically the custodians of their host states. The departure of the CDU/CSU from the federal government does not mean that the Ampel parties will close their doors to these companies; not least as the SPD has already been in government since 2013. But it does complicate the political dynamics for lobbying.

Again, this is mainly a question of the speed with which sanctions are imposed (and their sequencing) rather than their substance. An Ampelkoalition is unlikely to propose anything beyond the suspension of cohesion and NGEU payments under the conditionality mechanism. The Greens mooted over the summer that EU funds to Hungary could even be reduced, but the SPD’s Olaf Scholz dismissed this vague suggestion as being legally impossible.

More significant would be the abolition of unanimous voting at the EU level, which the SPD proposes and over which there is increasing discussion. This could change the political dynamics within the EU very significantly, as it would likely enable the suspension of the voting rights of wayward member states. However, it would likely increase polarisation within the bloc, especially between east and west. That said, Germany could certainly still treat Poland with more caution than Hungary. At least the coalition paper emphasizes the need for close coordination in the Weimar Triangle (France, Germany, Poland)

Ostpolitik unchained?

The Ampel parties, especially the Greens and FDP, are united in their desire to promote a foreign policy that puts values at its forefront. This would indicate that relations with Russia and China would deteriorate. More likely, values-based foreign policy will boil down to a question of marketing rather than substance.

For example, the SPD has in recent years attempted to revive its Ostpolitik from the 1970s, expounding a new foreign policy framework that would promote values-based engagement with Russia.  But, despite occupying the foreign ministry, the party has failed to comprehensively develop the practical particulars of such an approach. Indeed, it belies the party’s ambivalent stance with respect to Russia, with which it arguably has the best relations (relatively) out of the mainstream parties.

In the coalition paper, there is a brief mention of the need for Europe to ensure the diversification of its energy supply – in other words, away from Russia, Germany’s primary energy supplier. This is significant rhetoric given Germany’s commitment to the Nord Stream 2 gas pipeline, the opposition to which the Greens will likely abandon. Substantive moves in this direction would be very significant for most states in CESEE, the vast majority of which are strongly in favour of diversification.

However, it is unclear which geopolitical steps an Ampelkoalition would proactively take to diversify supply. The outgoing grand coalition supported expanding the infrastructure for importing liquified natural gas (LNG), but the terminals that are envisaged in Brunsbüttel, Wilhelmshaven and Stade are facing questions over their viability.

Outside of Germany, greater commitment to energy diversification could entail that an Ampelkoalition will increase support for the Three Seas Initiative (3SI), which seeks to develop infrastructure across EU-CESEE on a north-south axis – and to which Germany finally committed in 2021 following years of flip-flopping. As part of 3SI, LNG infrastructure is being developed, but it is more probable that an Ampelkoalition would prioritise the financing of green projects.

As such, the strategic steps that an Ampelkoalition would take to diversify energy supply both domestically and within Europe remain unclear, indicating that there is no clear vision beyond focusing on the development of renewable electricity at home.

Waiting for enlargement

It is noteworthy that the coalition paper does not mention the enlargement of the EU, let alone the prospects of the Western Balkan states joining. The Greens set out some specific objectives in its election programme, while the SPD paid only lip service and the FDP did not raise the issue at all. This suggests that an Ampelkoalition will continue a policy of passivity on enlargement, supporting it in theory but leaving the stage vacant for states such as France and the Netherlands to capitalise on their relative influence.

Indeed, Germany has squandered considerable amounts of political capital in the Western Balkans, with the USA remaining the state with the most influence. Individual items, such as visa liberalisation for Kosovar nationals, might inch forward, but an Ampelkoalition would need to commit considerable resources to generate fresh momentum, for which there does not seem to be political will.

Strengthening the core

Based on these indicators, our assessment is that an Ampelkoalition is unlikely to depart radically from the policy continuum. Yet a key variable will be how the ministerial portfolios are divided between the three parties, especially those of finance and foreign affairs.

Overall, German influence within the EU as well as internationally is not likely to increase in comparison with the Merkel era. In CE/SEE it may even possibly decline. Merkel was a well-known figure here and in large parts of the region respected as an anti-communist lamplight. Merkel also had a deep understanding of Eastern European and Russian history; the new German leadership is likely to be less versed in this and thus possibly understand the region and its problems (even) less.

Nonetheless, the primary implications for CESEE of an Ampelkoalition is that there will be support for measures that, deliberately or otherwise, increase the likelihood that a two-tier EU will emerge. The Western European member states, led by Macron and the Netherlands’ Mark Rutte, have been championing the strengthening of the “core” for some years now, to which Angela Merkel was opposed.

Many of the measures in this respect were likely to have eventually been implemented regardless. But timing is important, and with the faster implementation of punitive measures to uphold the rule of law – including facilitating the potential suspension of the voting rights of EU member states such as Hungary and Poland – divergence is more likely than convergence. Such a scenario could be mitigated by the deepening of interdependence through fiscal integration; however, the FDP is very unlikely to support such measures.

More likely, an Ampelkoalition will remain primarily concerned with domestic issues, namely the strengthening of domestic demand through public investment and ‘pre-distributive’ measures. This is likely to have a positive economic impact for CESEE states even in the event of increasing geopolitical polarisation.

Ultimately, Germany is one (admittedly major) actor in an ensemble cast. Political developments elsewhere will therefore influence its priorities. If the united opposition defeat Orban’s Fidesz party in the Hungarian election in 2022, or the Law and Justice Party in Poland calls snap elections that it loses, this will change the outlook very significantly. Confrontation may then no longer be necessary. Risk-averse foreign policymakers in Germany may then breathe a sigh of relief. 

Marcus How is Head of Research & Analysis at ViennEast Consulting. Gunter Deuber is Head of Research at Raiffeisen Bank International in Vienna.