Strong leadership across Europe now looks like wishful thinking

German Chancellor Angela Merkel, British PM Theresa May and French President Emmanuel Macron at Brexit talks on October 19, 2017 in Brussels, Belgium.
Dan Kitwood | Getty Images
German Chancellor Angela Merkel, British PM Theresa May and French President Emmanuel Macron at Brexit talks on October 19, 2017 in Brussels, Belgium.

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 U.K. — are leaving citizens feeling disappointed – and more worryingly, it is having spillover effects into matters outside of domestic politics.

Brexit and U.K. 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 was at risk of collapsing after a no-confidence motion was tabled against the Deputy Prime Minister Frances Fitzgerald over a police whistleblower scandal. This could have led to new elections in December.

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 favored 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 impact on the German economy is non-existent so far.

Last month, we saw the German business morale hitting another record high in November, with the IFO Institute adding that the economy is "headed for a boom." Just last week, data confirmed that the German economy grew by 0.8 percent in the third quarter, which led to the IFO Institute upgrading its growth forecast for the German economy to 2.3 percent this year, from 1.9 percent previously.

Talking to me on CNBC, Clemens Fuest, the president of Munich-based 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 "revitalize 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 U.K. 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 U.K. 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.

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