As Germany gears up for federal elections this month, we take a look at the top candidates seeking to fill Chancellor Angela Merkel’s shoes. Her successor will not only take on the challenge of ushering Germany through a pandemic in a period of geopolitical volatility but will also face a battle for control of the European Central Bank, as discussed below. This week we also examine developing trends in two major geopolitical hotspots: the Middle East and the South China Seas. 

Germany Gearing Up for Election 

Germany: Sholz Seeks to Topple a CDU Reeling as the Merkel Era Ends

Guy Chazan, Financial Times 

The Social Democrats’ Surge Upends Germany’s Election Campaign

The Economist 

With Chancellor Angela Merkel stepping down from her 16-year tenure in Germany’s top office, there is much uncertainty as to who will fill her shoes.  The Christian Democratic Union, Merkel’s party and the ruling coalition leader, has fielded a remarkably unpopular candidate in Armin Laschet, whose highly publicized gaffes have cost him public support. The party has also ironically suffered from Merkel’s strong leadership of the ideological coalition: her departure leaves little in the way of defined policy for Laschet to continue. One of Laschet’s strongest competitors, Annalena Baerbock, the Green Party candidate, has dealt with allegations of plagiarism and CV embellishment. And Olaf Scholz, the country’s current vice chancellor, seems to have successfully conveyed himself as the natural successor to Merkel despite being a member of the opposition party. Mr. Scholz’s reserved personality may not win him any prizes for charisma, but his pragmatic, modest approach has gained accolades and mirrors the outgoing chancellor’s stoicism. While Scholz’s ideology differs from Merkel’s, and his coalition has a long way to go before securing Germany’s top spot, the vice chancellor’s reserved approach to governance has mounted a significant bid at the supreme office. With Germans going to the polls on September 26, much about the future of German leadership remains undecided.

‘We need jobs, we need a strong economy’: Covid and Biden allay Middle East tensions

Andrew England, Financial Times

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The pandemic’s devastating economic impact and Joe Biden’s election are two factors that have moved many leaders in the Middle East to “recalibrate” their foreign policies, ushering in a new environment of de-escalation. Regional leaders are recognizing that their countries will not be able to recover from the economic crisis brought on by the pandemic unless things are stabilized politically. During Donald Trump’s presidency, regional tensions were heightened by the Trump administration’s hostility towards Iran. On the other hand, the Biden administration, which is keen on a return to the nuclear accord with Iran, has prompted a reassessment of relations with Iran, particularly for Saudi Arabia. Now, after cutting diplomatic ties in 2016, arch-rivals Saudi Arabia and Iran are reportedly in talks and have even discussed the possibility of opening consulates. Additional signs of changing regional dynamics are the lifting of Saudi Arabia’s three-year diplomatic travel and trade ban against Qatar and the United Arab Emirates’ efforts to improve relations with Turkey and Iran. However, diplomats and analysts are warning that this period of “cold peace” could easily be upended. As Emile Hokayem at the International Institute for Strategic Studies put it, “This [de-escalation] is fragile and reversible because it is a product of temporary regional circumstances . . . not a widespread change in mindsets.” While there are signs of de-escalation on the surface, the underlying tensions could be re-sparked at any moment.

China’s Power Grab in the South China Sea

Bonnie S. Glaser and Gregory Poling, Foreign Affair

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While Western powers can exert some influence in corralling China’s expansion in the South China Sea, the regional claimants themselves (such as Vietnam and the Philippines) must be the main engine of resistance if a “rules-based maritime order” is to prevail. While several of these countries recognize that China’s claims in the region are illegal, only a few have made any show of resistance, and fewer still have done so publicly due to the cost of opposition to Beijing. While the Philippines had been a vocal opponent of China’s expansion, under Duterte the administration backed off the pressure as China promised to send aid and investment (which never materialized). More recently, however, the Duterte administration has strengthened its ties to the US and has begun to call public attention to Chinese militia presence in Philippine ports. These actions provide a critical basis for other actors in the area to potentially form a coalition against Chinese interests. Such a group would inevitably pose an economic cost to the member nations due to their entanglement with China’s activity, requiring foreign partners to shoulder much of this burden in order to maintain the pressure. Still, with Beijing’s sphere of influence expanding every day, the US and its regional partners are running out of time to reach an agreeable equilibrium in the South China Sea.

Germany and Italy Battle for Control of the ECB

Francesco Casarotto, Geopolitical Futures

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A unified monetary policy among European Union (EU) states was supposed to bring cohesion. Instead, economic policy has become the most contentious issue among EU members as the bloc’s “one-size-fits-all” policy does not equally provide the economic support and stability needed for each unique country. This is on full display in the rivalry between Germany and Italy. Germany’s economic stability rests in its exports. Because almost half of Germany’s GDP comes from its exports, it relies on the integrity of the eurozone and European single market which is a key export destination for German goods. Additionally, it depends on price stability and low inflation to keep German exports competitive which is why Germany has always insisted on tight monetary policy for itself and the European Central Bank (ECB). On the other hand, Italy has struggled with the limited options the monetary union gives it to solve financial problems. Prior to being a member of the single currency, the euro, Italy devalued the Italian lira and injected liquidity into markets when needed to gain competitiveness and promote economic stability. Now, the only option it has to regain competitiveness is to compress salaries, and the low inflation environment that Germany thrives off hurts Italian consumption and investment. Furthermore, Italy needs easy money to keep its debt in check.

Being that the Bundesbank was the original model for the ECB, the primary goal of the central bank has historically been price stability. This has made Germany, essentially, the leader of the eurozone. However, after the 2008 financial crisis and eurozone crisis in 2010, the ECB began loosening its monetary policy. A few years later, in 2014 and 2015 under the leadership of Mario Draghi, an Italian, the ECB launched its Asset Purchase Program to reduce the risks of prolonged periods of low inflation and it helped states sustain their public debt. The Pandemic Emergency Purchase Program implemented in 2020 to aid countries in their recovery from Covid-19 is a similar measure. Germany has been displeased with these policies that stimulate inflation, so much so that Germany’s Federal Constitutional Court ruled in 2020 that one of the ECB’s bond-buying programs was partially unconstitutional. While Germany may have had more power over the ECB at the beginning, it has gradually lost its sway as differences in opinion on the central bank’s board have grown to reflect the divergent views of EU member states. The ECB cannot let Italy, the third-largest eurozone economy, to fail, and neither can Germany, but it also cannot agree to open-ended loose monetary policy. The author sums it up perfectly: “As is often the case, the EU needs compromise. The result will likely be insufficient and disappointing for both parties.”