The extraordinarily tight outcome of the German elections has created the danger for the European Union of prolonged negotiations before the next federal government can be formed, lasting even as long as until Christmas. However, it also contains a most significant opportunity. This is not merely due to the defection of voters from the anti-European extremes of Die Linke and Die Alternative für Deutschland. Far more important is the fact that the key to the nature of the new government will be an accord over the future of the euro: the very core of the European project.

Whilst another grand coalition of Social Democrats and Christian Democrats is theoretically possible, the substantial losses imposed by the electorate upon the latter, which have further exacerbated their internal personality tensions, after Frau Merkel announced her retirement, makes this highly unlikely. Christian Democrats will surely prefer opposition to serving under a Social Democrat Chancellor. So a new coalition will either be the Social Democrats, Greens and Liberals or the Christian Democrats, Greens and Liberals. Which it is, depends upon the outcome of negotiations between the Greens and the Liberals. The Greens’ undoubted bias in favour of a coalition led by the Social Democrats, who are the big winners in the election, and the Liberals’ undoubted bias in favour of a coalition with the Christian Democrats, who are the big losers, will colour their negotiations, as will the fact the Greens improved their share of the vote more markedly than did the Liberals: but it will be the substance of the accord between them which is decisive. And that substance will be, in very large measure, about the future of the euro.

For the Greens and the Liberals represent the two poles of the German debate over the fiscal integration of the eurozone, the central issue surrounding the single currency. The Greens believe the euro can only flourish if it has a more expansionary fiscal architecture and above all, mutualizes its future borrowing. They favour increasing the Maastricht Treaty deficit limit of sixty per cent of Gross Domestic Product, which is currently temporarily suspended on account of the pandemic, to one hundred per cent, with a long adjustment period for countries which currently exceed that level. They seek a whole new issuance of bonds collectively guaranteed by the European Union, similar to those already being issued to address the financial burdens of the pandemic, but on a scale commensurate with vastly greater investment necessary to address Climate Change. A scale indeed, which would, over time, mean the volume of such outstanding mutualized debt becomes significantly larger than that issued in the names of the individual member states. Not only would this ease the implementation of the new Maastricht debt to Gross Domestic Product ratio: it would begin to create a proper euro-denominated equivalent to the United States Treasury market.

The Liberals, since Die Alternative für Deutschland shed their economic and constitutional opposition to the euro in favour of their ethnocentric and cultural opposition to immigration, have been the most serious supporters of the Maastricht deficit criteria and the most consistent critics of further eurozone fiscal integration. But their main ire has been directed against the European Central Bank’s programme of bond purchases and policy of negative interest rates. The former they regard as not just undermining any restrictions on borrowing by member states and entailing de facto debt mutualisation by the back door, but as constituting, in itself, an enormous direct increase in the money supply that must prove powerfully inflationary. The latter they consider to be fundamentally incompatible with a capitalist economy.

On the face of it, therefore, it might be supposed that any accord, other than a stand-off, will be impossible. And yet a resolution of this debate is increasingly demanded by events. We are at a major turning point in the world economy. The massive deflationary forces released by the collapse of communism are going into reverse. The enormous capital costs of combatting Climate Change are becoming ever clearer. Globalisation is retreating into regional blocks. Borrowing is at record levels. Price rises for many products and processes are not being matched by improvements in productivity. Political considerations of strategic and social security now trump those of mere economic efficiency. The emergence of crypto-currencies suggests a loss of confidence in free-floating fiat money. For the first time since the nineteen seventies the spectre of stagflation haunts the setting of economic policy, as the spectre of a systemic crisis haunts the setting of monetary policy.

We could be entering a real-world experiment to determine whether, in terms of the capacity to borrow and promote investment, trade, employment, and real and sustainable growth, it is better for countries to be in a single market, the deep integration of which is completed by a monetary union, or to remain outside such arrangements, retaining their own currencies. In short, the definitive test of the entire economic case for “Ever Closer Union”. This test can only be passed if a compromise is reached between the Greens and the Liberals. For a complete victory by either risks both the external market credibility of, and the internal political support for, the single currency.

However, the shape of such a compromise, of a new German consensus on the euro, is already apparent in the detail of the election campaign. The Greens have highlighted the dangers of inflation, and the impact of negative interest rates, on the poorest parts of society. The Liberals have accepted the existential imperative of combating Climate Change and the fact that the technological revolution required to do so will be extremely capital-intensive. So many observers now believe it is very likely that the Liberals will accept an increase in the Maastricht debt to Gross National Product ratio rule, and the issuance of new, mutualized “Climate Bonds”, in return for the Greens conceding a rapid end to Quantitative Easing and negative interest rates by the European Central Bank and the imposition of a legal requirement that such policies may only be pursued in future in the most exceptional and tightly defined circumstances. If such indeed proves to be the case, this election could come to be seen as one of the most important in the entire history of the Federal Republic.