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August 29, 2018

Germany considers financial assistance to Turkey

We argued before that the refugee deal between the EU and Turkey was a pact with the devil - or rather more concretely a decision that solved a short-term problem with very high long-term costs. These costs are already becoming real. The Wall Street Journal has a story this morning that the German government is now seriously considering to provide emergency financial assistance to Turkey, fearing that an economic crisis might endanger Turkey’s willingness and ability to adhere to its side of the refugee bargain. The article said the talks were at an early stage. Under discussion are a co-ordinated bilateral EU bailout, similar to the first Greek bailout. The article quotes a German official as saying that the German government would go a long way to stabilise Turkey because it has no political alternative. Discussions have taken place between Olaf Scholz and his Turkish counterpart, Berat Albayrak. President Recep Tayyip Erdogan is due for a visit to Berlin on September 28. 

The Germans are furious with Donald Trump’s decision to impose sanctions on Turkey, which one official called an insane and ill-informed policy. One of the issues on which the EU has come to an internal agreement is whether to make a bilateral financial package contingent on IMF involvement - the same issue as during the eurozone crisis. Turkey has so far resisted this option. The Germans are so desperate that they are even considering direct bilateral aid in the form of untied financial credits, an instrument last used to help Hungary in the 1980s. But, given the size of the Turkish economy, we think this is not a very probable route. The article quotes an opinion poll in Germany according to which 72% are opposed to financial aid to Turkey. The thinking of the German government is reflected by an unnamed official who is quoted as saying:

"We cannot just sit and watch Turkey go down the drain. The migration pressure and the geostrategic importance, as well as the economic links, are too important."

If Germany goes ahead with this, we think the AfD will be the biggest political beneficiary. Aid to Turkey - along with police inaction during violent demonstrations - are ideal subjects for the AfD to portray itself as the voice of the people versus the establishment.

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August 29, 2018

Why right-wing parties are setting the agenda everywhere

The fundamental problem of western liberal democracy, today as well as in the 1920s/early 1930s, has been a built-in tendency to produce economic instability, and not fixing the problem. We do a few things better today than we did back then. We learned the main macroeconomic lesson and avoided a deflationary spiral. But we are not solving the underlying problem of rising economic insecurity in large parts of the population.

Economic insecurity explains the discontent in the US, the UK and Italy, and is expressing itself in voting behaviour the liberal establishment finds hard to comprehend. And this is now spreading to much more stable economies like Germany and Sweden. In Sweden there will be general elections on September 9. Anders Hellström makes the observation that the campaign is dominated almost entirely by the Swedish Democrats who, contrary to what their name suggests, are a party of the far right similar to the AfD. The problem in Sweden, as elsewhere in Europe, is not only the likely share of the vote of the SD, which polls at around 20%. The issue is how their policies have infiltrated the other political parties. They have become the agenda setters. Hellström believes the other parties should not take up their bait, and defend liberal values instead. Easier said than done.

In Germany, the AfD remains on the rise. Over the weekend there were violent demonstrations where neo-Nazi clashed with supporters of the far left, a situation now exploited by the AfD which is portraying itself as the law-and-order party. The police in the state of Saxony - as in Hamburg during the G20 riots - is clearly not up to the job. 

There has been a dramatic shift in the opinion polls in some of the east German states. In Saxony, Saxony-Anhalt and Thuringia the AfD is now firmly established as the second-largest political party. The CDU is still marginally ahead, but has lost a quarter of its support. In Saxony, a former CDU stronghold, the party is down from 41% to 30%. The SPD, which is the junior coalition partner in the state, is now down to 11%. A so-called grand coalition would no longer be possible there. The AfD, meanwhile, now polls at 25%, barely 5pp behind the CDU. In the state of Saxony-Anhalt, the old east German rust belt, the CDU is down from 40% to 28% with the AfD at 21%. Thuringia is a little different in the sense that the AfD has now been overtaken by the Left Party, which leads the state government there. 

German conservative commentators are now in a state of near panic. Jasper von Altenbockum, the FAZ political commentator, notes the AfD is ruthlessly exploiting the violence. He quotes Alice Weidel, the party’s co-leader in the Bundestag, who accuses the state government and the police of allowing slaughters on the streets of Chemnitz to continue. The established parties are completely rattled and speechless, and instead of unifying against the AfD they are split and attacking each other.

We see the AfD replacing the SPD as Germany’s second largest party within the next five years - barring some unforseen developments. The decline of the SPD is purely a consequence of demography. The AfD benefits from the economic misery in east Germany - relative to the west. East Germany was politically and economically not prepared for the large influx of migrants. The AfD will not become Germany’s largest party, but we reckon it will eventually become a coalition partner, initially in state governments. This will happen whenever it becomes impossible for the other parties to form a coalition. The more votes the AfD gets, the greater the chances of that scenario, especially as the CDU categorically rejects any coalitions with the Left Party.

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