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Merkel faces biggest economic challenge yet

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Credit: World Economic Forum
Credit: World Economic Forum

The world's fourth largest economy finished another election on the 22nd of September. Going in to the polls Chancellor Merkel looked secure in leading her party, the union of conservatives CDU/CSU, to a third victory.

Recent economic performance had been on the up, with growth finally returning and the shadow of European bailouts beginning to fade. Whilst Greek opinion of the chancellor was terrible, domestically Merkel is a popular figure often referred to as 'Mutti' (mother). The uncertainty in this election lay in whether her then coalition partners, the Free Democrats, would be able to maintain a presence in the Bundestag.

The conservative bloc managed to achieve a 41.5 per cent vote share, leaving them just short of a majority. This was one of the highest vote shares in German history, outperforming the already high expectations that the party held. Although a significant achievement, the result means that once again Merkel will need to go into coalition talks.

Her options are more limited this time, and it seems likely that another grand coalition will have to be formed with the Social Democrats.This may not be all too appealing for the opposition however, as they were punished in the 2009 election for their role in the coalition. The Social Democrats may therefore approach another partnership with caution, and use this fact to get a better return for their support in terms of legislative influence. The SDP is seen as being less keen on austerity measures, yet the scale of Merkel's victory means it is unlikely to have a big impact. Germany will still maintain high expectations of economic reforms in return for their fronting of European bailouts.

The initial reaction of the markets has been muted. The re-election was fully expected, and the true response will come when the full details of any coalition agreement have been revealed. There is much to keep the eyes of investors elsewhere, especially following news of the unexpected continuation of monetary stimulus in the United States. If the sovereign debt crisis were to flare up again, that is when the true effects of this election will be felt upon the worlds markets.

With three elections won, Angela Merkel has equalled Margaret Thatcher in electoral results, the politician that she is most often compared with. But she may well be the one to lead to the tightest union yet. Germany will still be the powerhouse of the European economy and the counterweight to France's more relaxed approach to austerity.

With the rise of right-wing parties such as Golden Dawn, the prospect of tighter European integration has been put on the back burner. Yet not all are dissuaded from the European project, with former Polish president Lech Walesa calling for a full union between the two countries.
The next big test of Merkel may well not be economic but a political one.

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