x

Abu Dhabi, UAEMonday 18 June 2018

Strong leadership across Europe now looks like wishful thinking

Nations traditionally revered for their stability are losing credibility over poor decision making

German chancellor Angela Merkel, right, and British prime minister Theresa May, left, have both been plunged into a political crisis in their respective countries. Michael Sohn / AP
German chancellor Angela Merkel, right, and British prime minister Theresa May, left, have both been plunged into a political crisis in their respective countries. Michael Sohn / AP

Strong and stable leadership is difficult to come by these days across Europe.

The countries that have traditionally been the bastion of reliable leadership - Germany and the United Kingdom - are leaving citizens feeling disappointed, and, more worryingly, it is having spillover effects into matters outside of domestic politics.

Brexit and UK leader Theresa May’s ill-fated snap election have left the Conservative government hamstrung and weakened, as the prime minister seems to be hanging onto her position by a thread.

The latest installment of this political vacuum was showcased by Ireland, where the minority government is at risk of collapsing after a no-confidence motion was tabled against the deputy prime minister Frances Fitzgerald over a police whistleblower scandal. This might lead straight to new elections in December - ironically around the same time Ireland will have a veto over whether Brexit talks can move on to the next level of discussing future trade deals.

And in Germany, which is usually considered an absolute beacon of stability, we are facing a political earthquake as exploratory talk on a potential “Jamaica” coalition have faltered spectacularly after the FDP’s (Free Democratic Party) Christian Lindner proclaimed blearily, after another long night of talks, that he would pull his support for further discussions to form a government.

As I am writing this, the parties in Germany are under pressure to deal with shock of the unprecedented nature of the collapse and the utter lack of workable alternatives. New elections have been favoured by Chancellor Angela Merkel but talks are still ongoing about a potential return of the much-loathed, yet functioning “grand coalition” between the CDU (Christian Democratic Union), its Bavarian sister party the Christian Social Union (CSU), and the Social Democratic Party (SPD). A revival of talks about a potential Jamaica coalition including the Greens, CDU/CSU and the liberal FDP party has now been ruled out by Lindner.

But surprisingly, the effect on the German economy is non-existent so far.

_____

Read more:

Germany's Merkel bids for grand coalition to end political crisis

Germany, the rock that steadied Europe, is now frustrating its reformers

UK and EU agree Brexit divorce bill, reports

_____

On Friday, we saw the German business morale hitting another record high in November, with the Munich-based IFO Institute for Economic Research adding that the economy is “headed for a boom.” Just last week, data confirmed that the German economy grew by 0.8 per cent in the third quarter, which led to the IFO Institute upgrading its growth forecast for the German economy to 2.3 per cent this year, from 1.9 per cent previously.

Talking to me on CNBC recently, Clemens Fuest, the president of the IFO Institute, said that only a period of prolonged uncertainty brought about by new elections early next year might impact business sentiment, adding that “we are very far away from that scenario.” Even a minority government might work as this would “revitalise parliamentary debate,” he added.

In fact, when I asked Hans Redeker, head of foreign exchange strategy at Morgan Stanley, about a slowdown in investment in growth as a result of the collapse in coalition talks, he said: “When things are going well in the economy, you don’t necessarily need strong leadership – it is only when the economy isn’t doing well that you need leadership."

So far so good - few people seem to be concerned about the economic impact due to the German mess that we are finding ourselves in. But there are those who still won’t sleep easy - Brexiteers and Macronistas.

Clemens Fuest added that the bigger implications of the political power vacuum in Germany will be for Brexit talks at the EU Summit in December and the further fiscal integration of Europe: “Without a German government it will be more difficult – though not impossible – to move ahead with Brexit talks. It will also make it harder for talks on the reform of the euro zone. There was the hope that we would have a Franco-German proposal in the first half of 2018 and that seems a lot less realistic now,” he said.

And let’s not forget about Ireland. So far, the Irish have said they need more assurance from the UK on a seamless border between Northern Ireland and Ireland. Add some messy domestic politics to the mix, and I feel it is rather unlikely that Ireland will provide the green light for Brexit talks to move onto trade deals after the December summit.

The bottom line: political uncertainty in one country can hardly ever be contained, given the close links we are still enjoying within Europe. The UK may be very intent to cut those links by exiting the EU, but for now the harsh reality is that it is still deeply intertwined with the bloc it is so eager to wave goodbye to.

Strong and stable leadership across Europe for now seems wishful thinking and is leaving a bitter taste in European’s mouths.

Carolin Roth is an anchor for CNBC International. You can follow her on Twitter @CarolinCNBC

The National and CNBC International are global content sharing partners.