"Dream Coalition"

Yesterday, re-elected Chancellor Angela Merkel finally realised her dream and led a staunchly centre-right coalition government into office. The three ruling parties—Merkel's Christian Democratic Union (CDU), the liberal Free Democratic Party (FDP), and the Bavarian Christian Social Union (CSU)—won approval for the new government line-up yesterday, obtaining 323 of 612 votes in the Bundestag (lower house of parliament), and were sworn in by President Horst Köhler. However, this meant that at least nine members of the ruling parties rejected the cabinet line-up in the anonymous vote. The newly elected cabinet met for its first official session yesterday afternoon and at the heart of its discussions was Germany's future European Union (EU) policy. Later in the day, Merkel and her new foreign minister—FDP leader Guido Westerwelle—flew to Brussels (Belgium) for the latest EU summit. The new government's programme will be presented and voted upon next week.

This government breaks with the recent past in a number of ways. It is the first centre-right government in 11 years and follows an unhappy "grand coalition" between the CDU/CSU and the centre-left Social Democratic Party (SPD). Merkel has also become the first chancellor to be re-elected with a different coalition government. The 15 ministers will not lose any time in tackling the pressing socio-economic challenges and Merkel's record will certainly put a spring in their step. However, there are huge disparities within the government, the ruling parties, and the wider public alike over the balance the cabinet should strike between greater social welfare and more tax cuts. Köhler added to that pressure by urging the new government to refrain from presenting unrealistic economic growth projections and to commit to reducing the public deficit significantly. He also said that the government should rein in previous banking methods that helped bring the financial markets system to its knees.

Positioning of Loyalists

The new cabinet tries to strike a balance between more and less state interference and taxes and public spending. Of the 15 ministries, 12 have new leaders—and not only because of the SPD's departure from government. Overall, it is a very pro-Merkel cabinet, with loyal CDU politicians installed at the Finance and Interior Affairs Ministries.

One of the greatest surprises is the appointment of Wolfgang Schäuble (CDU) as finance minister. At first sight, this is a rather awkward pairing—Schäuble has not spoken out prominently on state expenditure in the past and rather carved out a reputation as a hard-hitting interior minister in Merkel's previous government (2005–09). However, Schäuble deals well with pressure and although he may not be an expert on financial affairs, he is one of the most experienced federal ministers Merkel has and is very loyal to the chancellor. Given the huge challenges facing the Finance Ministry, Schäuble's appointment may prove to be key to safeguarding the CDU's interests.

The FDP has obtained the Economy Ministry portfolio. This ministry is traditionally significantly weaker than the Finance Ministry but still ranks highly in the cabinet pecking order. The CDU/CSU and FDP have tried to divide those cabinet positions that are closest to government funds according to the number of seats the parties have in the Bundestag. FDP Economy Minister Rainer Brüderle is less extroverted than his predecessor, Karl-Theodor zu Guttenberg (CSU), but a safe pair of hands is just what the FDP needs to keep the towering, CDU-led Finance Ministry in check.

Zu Guttenberg will now have to devise Germany's defence policy, without much in the way of funding and amid significant pressure to increase the number of German soldiers taking part in international missions. Controversially, the FDP has obtained the Foreign Ministry post. Critics argue that zu Guttenberg should have obtained this given his knowledge of foreign affairs, but Merkel may have stationed zu Guttenberg at the Defence Ministry to accommodate the FDP's wish for a high-profile ministry and to simultaneously curb Westerwelle's room for manoeuvre; indeed, the defence and foreign ministries will have to fine-tune their policies more often than Westerwelle may want to.

Outlook and Implications

Like its predecessor, this cabinet will have to keep a lid on internal conflicts if it wants to see out its term. However, this time key stakeholders outside the government will be more vociferous. Anxious and eager CDU members in particular are keen to see their demands realised and they will defy Merkel more than in the past. The CDU/CSU can also expect little support from the leaders of regional governments, most of whom are CDU members, as the FDP-driven plans to reduce income tax from 2011 onwards have soured ties with most regional leaders. Federally levied income taxes are a lifeline for regional governments, which receive around 40% of revenues from these. Given the sharp economic downturn, tax receipts have fallen considerably and the planned 20-billion-euro reduction in income taxes will only exacerbate the states' lack of funds. For now, the protests are fairly subdued, but they will become louder when Merkel presents the government's programme next week. They may reach a peak as regional elections in North Rhine-Westphalia (NRW), a CDU stronghold, approach. The states exert significant power on the Bundesrat, the federal upper house of parliament and Schäuble's task would become infinitely more difficult should NRW pass to the SPD at the polls next May. Nor will CDU/CSU members warm to the government's expenditure cuts in healthcare. Trade unions have already threatened to hold strikes soon.

For now though, Merkel is taking her first steps in the glare of the limelight with a new, dynamic cabinet. As of next week, she will see precisely how much room she has for manoeuvre.

Global Insight (Reino Unido)