German Politics May Be a Mess, But the Economy Is Soaring

By Andrea Thomas Features Dow Jones Newswires

Germany hasn't had this much trouble forming a government since the 1930s. Many Germans don't seem to care.

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Acting Chancellor Angela Merkel scored a disappointing win in September elections. Coalition talks among a disparate group of parties collapsed after two fruitless months and there's no guarantee of any other option to pull it out of the mess. The headlines are dominated by bickering in Berlin.

Much of Europe is wondering what has happened to a country that used to be the home of political predictability. But in Germany, the economy and markets are buzzing along as if nothing is happening.

"Everything is running smoothly; it's not as if things aren't getting done or affecting people directly," says Hermann Binkert, head of opinion-polling company INSA.

Polls indicate that Ms. Merkel is still popular within her party and that many Germans don't seem to be too worried at this point about how the coalition works out. "At the moment, the psychological strain on Germans isn't so big for them that they say the parties should finally get their act together," Mr. Binkert said.

The fate of the government now appears to be up to the Social Democrats, a center-left party under pressure to form a "grand coalition" with Ms. Merkel's conservative bloc, which it has been reluctant to enter once again. German President Frank-Walter Steinmeier will meet Thursday evening with Ms. Merkel and the leader of her conservative sister party, as well as with Social Democratic leader Martin Schulz to discuss ways out of the mess.

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But German chaos is relative. The economic news seems to be getting better, even as the political news is murky.

The Organization for Economic Cooperation and Development raised its growth forecast to 2.5% this year, the best for six years. The Ifo business-confidence index reached an all-time high in November.

The DAX-30 benchmark stock index initially fell on the news that coalition talk had collapsed, but recovered and is currently only sightly lower than its all-time high of 13,525 reached earlier in the month. German 10-year bonds have hardly reacted. The euro is near a two-month high.

There is a caretaker government in place and Ms. Merkel's outgoing coalition of conservatives and the Social Democrats can draft bills and send them to the lower house. Government coffers are bursting and the finance ministry is working to draw up a spending plan to last until the next government is able to draft a full budget.

The failure to form a government amid squabbling between politicians reminds Sybille Frank, a 53-year-old commuter from Wismar, of kindergarten, but she isn't worried.

"Germans can put up with something for a long time," Mrs. Frank said. "Our blood is colder."

In the long term, companies believe the government must address challenges stemming from skilled workers' shortage and the aging population and must help make the country fit for a digital age. "A new government must strengthen the German economy's competitiveness," said the BDA Federation of German Employers' president Ingo Kramer.

But, for now, even if there were a government, there's not much required to navigate the economy given its robust state, said Ifo economist Klaus Wohlrabe. "At the moment, things are running very smoothly and there is nothing that politicians could do economically in the short-term to boost this further."

While public employees will continue to get paid and infrastructure maintained, the current impasse does put a stop to new investment and imposes a hiring freeze, including for new police officers promised by Ms. Merkel's conservatives.

That also means the government budget surplus--seen by critics as a sign that Germany must invest more in its internet and highway infrastructure--will balloon.

"We already have a huge cushion and the question is what to do with it," said an official from the parliament's budget committee.

Polls also suggest confidence in Ms. Merkel, with support for her conservatives at 32% on Nov. 24-27 in an INSA poll, up from 30% on Nov. 20, and similar to its pre-election tally.

Many are open to any government she forms. Others just see politics as usual.

"This all doesn't bother me," said Hans-Dieter Bykowski, a 77-year-old pensioner from Berlin, who has witnessed the collapse of Nazi Germany and the fall of the Berlin Wall. "They will do what they want anyhow."

Emese Bartha

in Frankfurt and

Jessica Fleetham

in London contributed to this article.

Write to Andrea Thomas at andrea.thomas@wsj.com

(END) Dow Jones Newswires

November 30, 2017 05:53 ET (10:53 GMT)