Angela Merkel’s hard line on immigration puts Eurozone at risk

As the British Prime Minister Theresa May and President Trump begin the work of building a bilateral US/UK trade agreement in a post-Brexit world, some of May’s old European partners are doubling down on their demands for future negotiations.

Indeed, the United States is now only one of 13 nations with which May is working to obtain trade deals outside the EU.  

{mosads}She followed up her meeting with Trump, immediately, with talks with Turkey’s President Recep Erdogan in which she secured a deal for BAE Systems to assist Turkey in developing that country’s first fighter jet.

German Chancellor Angela Merkel opened her stand on the coming Brexit negotiations with a risky gambit Friday,  saying that the UK would only get access to the EU if it accepts the freedom of movement of workers. 

Merkel’s comments came just ten days after UK Prime Minister Theresa May struck a more ameliorative tone with her twelve principles for the negotiations.

Merkel’s intransigence on immigration could put her own chancellorship, the EU and the German economy at risk from populists, nationalists, and rightists.  She should reconsider.

Brexit Really Was About Immigration.  

Nigel Farage, the UK Independence Party, made clear that the number one issue in forcing Brexit was immigration.

While polling says Brexit was about “sovereignty”,  the polling may reflect something akin to the “Bradley Effect”, where voters lie to pollsters to hide their racial prejudice, but as applied to immigrants.  

But even if that is not the case, immigration was a major factor for “Leave” voters. According to the Lord Ashcroft poll after the Brexit vote:

“(33 percent) said the main reason was that leaving ‘offered the best chance for the UK to regain control over immigration and its own borders.’ Just over one in eighth (13%) said remaining would mean having no choice ‘about how the EU expanded its membership or its powers in the years ahead.’”

A solid 46 percent, then, were concerned, directly or indirectly, about the UK future of UK immigration.  

The Wrong Hill to Die For

It seems an odd choice for Merkel to center her intransigence in the Brexit negotiations on the EU’s freedom of movement.
The rules covering “freedom of movement” in Europe are complex and disparate and apply in varying degrees to EU members and non-EU members through the Schengen Agreement, an element of EU aquis, or law.  

Germany is among the most liberal European nations with respect to immigration, and fully adheres to the Schengen Agreement, but Britain has never signed on to it (save for some law enforcement protocols).

Indeed, the UK and Ireland have the strictest rules for migration from within the EU of any of the EU nations. While EU residents traveling within the Schengen Area, which is different from the EU, are able to travel without a passport or national identity card, they cannot enter the UK without such documents.  

A Triple Threat of Risk

Merkel’s position on immigration presents an array of risks: first, to her own political future; next, to the liberal democratic norms of Europe; and, finally, to Germany’s economy.

The Risk to Merkel’s Chancellorship

Merkel’s popularity see–sawed in the fall, following the Nice terror attacks.  But the Berlin Christmas Market attack did not significantly damage Merkel’s popularity.  It has, however, induced her to take a harder line on immigration.  

Still, Merkel’s Chancellorship remains at risk:  

• Germany’s “Alternatives for Germany” (AfD) party, avowed opponents of immigration,  beat Merkel’s party by two points in bundesland, or state, elections in Mecklenburg-Vorpommern, Merkel’s home district.  (Her Christian Democrat Union (CDU) party maintained control of the bundesland legislature with a coalition of its Federal Republic coalition partner, the  Christian Social Union (CSU)).

• Last week, the leader of the party that is the strongest challenger to Merkel’s chancellorship, the German Social Democrats (SPD), pulled even with Merkel in polling for the coming chancellor’s race. That leader, Martin Schulz, a left of center former EU Parliament president, will run against the center-right Merkel when a chancellor is selected by the victors of the German Bundesrat (parliament) elections later this year.  

• Earlier this month, Merkel’s governing coalition partner, the Christian Social Union (CSU) reiterated its call for a 200,000 cap on migrants, a demand it has had since at least last fall.

While there is little doubt Germany will retain a mostly centrist government, it may not retain Merkel as chancellor.

The Risk to Europe

Playing the “immigration card” in the Brexit negotiations risks the entirety of the EU because it virtually assures that hardline, anti-EU, anti-immigration, nationalists, like France’s Marine Le Pen, who currently leads polls in France,  Holland’s Geert Wilders, and the other EU nationalist leaders will use Merkel’s intransigence on immigration to build broader populist political support among their respective nations’ electorate.

If they’re successful, Britain’s exit from the EU may be just the first of more EU member nations to leave.

The Risk to Germany’s Economy

Germany is, perhaps, the biggest de facto currency manipulator in the G-8.  It has the second highest  trade surplus as a percentage of GDP (after Holland) of any leading exporting country, including China and was added to a “watch list” of currency manipulators by the Treasury last year.
While manipulator countries usually sell their own currency for that of other nations to lower the value of the home country currency, Germany’s manipulation is more subtle.

Germany props up the weaker EU economies of Southern Europe with a policy that bankers call “extend and pretend:” lending good money after bad, with the expectation the loans are unlikely to be repaid or, at best, that their terms will be extended far into the future.  That keeps the weaker economies in the Eurozone and reduces the value of the euro relative to other currencies, the same objective of traditional manipulators.

By empowering rightists, populists and nationalists in the EU, Merkel risks Germany’s own version of “exorbitant privilege” as the strongest export economy in Europe.  

If Merkel helps the rightists, nationalists and populists come to power in Europe, as discussed above, she puts the euro at risk. If Eurozone governments return to their own sovereign currencies, Germany’s export economy will suffer substantially because its exports would be more expensive.  Even Germany’s “extend and pretend” loan portfolio to poorer EU countries will require a substantial write-down that could throw Germany into a deep recession.  

All this points to May very possibly being better able to steer Britain through Brexit better than Angela Merkel can steer Germany – and the EU – through the change.  

The chancellor would be wise, then, to tread carefully in trying to impose free movement as a condition for the UK’s access to its market.  It is a decidedly unpopular policy with a large segment of European voters.  

Merkel’s migration policy was even contested Sunday  by Wolfgang Schäuble,  her powerful finance minister.  Notably, Schäuble reacted strenuously to Theresa May’s threat to make Britain a tax haven in her speech of January 17th. But his support for EU freedom of movement has been much more muted.

Schäuble, an erudite, conservative, politician who has sometimes been more popular than Merkel, has likely already surmised the political risks of continuing the free movement issue and has set other priorities for Germany in the Brexit negotiations.
Chancellor Merkel would be wise to follow his lead.

J.G. Collins is the Managing Director of the Stuyvesant Square Consultancy in New York.  A “Never Trumper” during the 2016 election, he is a long-time critic of the bipartisan U.S. policy of unlimited free trade. He has previously written on U.S. trade policy for Forbes, The Daily Caller, and The American Conservative.