Thread by @Mij_Europe

Germany now faces weeks - if not months - of political uncertainty which creates all sorts of policy risk for Europe. A real danger in the months ahead is a lengthy period without a new voice of any kind in Berlin, just as France plunges into an uncertain election of its own 1/

Because EU faces three extremely big, complex policy questions in the third & fourth quarter this year - over Rule of Law issues with Pol & Hungary; the EU's fiscal orientation in 2023 & how to manage UK escalation over NI Protocol - which are crying out for a political steer 2/

But with a lame-duck Govt now in Berlin, soon to be followed by same in Paris, no major EU policy decisions are likely under either. This risk is the problems fester, escalate & subsequently become harder to resolve 3/

Moreover once a decision is made & a new Chancellor is in power, the demands & logic of office will force either Scholz or Laschet to take a grip of Germany's innate importance & advance its interests in EU debate. But *how effectively* they will do this also remains v unclear 4/

Put differently: it was obvious that Merkel's departure would negatively impact the EU's leadership & coherence. Whether this is temporal or structural is too early to say. But the fact Scholz' & Laschet's campaign performances make the question necessary is not a good sign 5/

On policy risks. Take the rule of law issues in Poland & Hungary. Regardless of who leads the next Govt in Berlin, there is a perception that “Merkel let this issue get out of hand”, as one senior German official tells me, and that Germany now needs to “course correct”6/

This pressure in Berlin coincides with developments in Bxl, where @EU_Commission finds itself under increasing pressure from @Europarl_EN to take a stand against both member states & not disburse monies allocated to them under the Recovery Fund (€57bn for Pol, €16bn for Hu) 7/

But the EU's case against both Warsaw & Budapest is not as legally tight as MEP’s would have you believe. As one EU27 Sherpa told me: “We are now giving the EU a role and competence it does not have - to judge constitutional issues in member states...” 8/

“In spite of a lot of propaganda in the EP, the EU does not have a real Rule of Law mechanism, but an anti-fraud mechanism. It is a protection for EU taxpayers. But the political debate in the EP is not about the misuse of EU funds, but the general state of politics in Pol & Hu”

Seen from this vantage point, officials in @EU_Commission & many EU capitals (bar Denmark & Netherlands) believe @Europarl_EN is trying to implement by stealth what it failed to achieve at last December's European Council - when ostensible “Rule of Law” mechanism was agreed 10/

Merkel always managed to keep EU27 united, albeit at some cost. How effective Scholz or Laschet will be at navigating this fine line - EU’s tenuous legal instruments combined with strong opposition from Warsaw & Budapest - & where it could all lead remains very unclear indeed 11/

Another big policy risk I've tweeted about a lot that the next German Chancellor will have to navigate is what to do about EU fiscal rules & Stability and Growth Pact (SGP) that's due to come back into force in 2023 12/

While Scholz is no fiscal hawk, he is pragmatic. And with FDP probably playing a key role in his Govt (with Lindner widely tipped as next finance minister) he is likely to be reluctant to fundamentally overhaul the SGP 13/

This is esp because FDP, while paying lip service to Germany’s debt brake, will be forced to agree more spending at home (most likely using off-budget investment SPV & re-purposed borrowing from 2021). Could more fiscal space in Germany come at expense of flexibility in EU? 14/

With pressure from Lindner, Scholz will be less effective at standing up to fiscal hawks, especially Dutch, who are pushing hard for full reimplementation of SGP in 2023 - not in belief that will happen, but to provide baseline from which negotiations must then take place 15/

As one well placed German official told me: “The room for something really new and sensible is much smaller than people think.” Another senior EU official concurs with this view: “The risk of disaster is higher than the probability of success” 16/

More fiscal space for green investments & a more gradual pace of debt reduction remain more likely than not. Perhaps the principle will win & magnitude will lose. But expectation in Paris, Bxl & Berlin yesterday was that Govt WONT have a strong position on this until Jan 17/

The last policy risk is Brexit - on which Scholz & Laschet have said little. But what if UK triggers Article 16 at Tory Party Conference on 3-6 Oct? Delegating to @EU_Commission is of course the default line. But it's unlikely to get the two sides off the escalator they're on 18/

So yes, Germany’s election result does create political uncertainty at home. But the bigger picture is already clear: we are looking at a period of weaker German leadership in Europe - with all of the associated policy risks that will bring

google.co.uk/amp/s/www.poli…

ENDS