Why German Markets Aren’t Worried About Angela Merkel. Yet.

Why German Markets Aren’t Worried About Angela Merkel. Yet.

FRANKFURT — Europe over the past decade has endured government bond meltdowns, bank failures, right-wing populists and Brexit.
So when talks to form a new German government broke down last week, raising questions about Chancellor Angela Merkel’s political future, the Continent’s business elite refused to panic.
In the week that followed, Germany’s stock market barely budged. The euro rose against the dollar. And the leading survey of German business confidence reached its highest level ever.
“The world has so many crises. Germany is not in crisis mode at the moment,” said Roland Berger, founder of the management consultancy based in Munich that bears his name.

At least for now, the thriving European economy seems capable of absorbing anything that squabbling politicians might throw at it. The political deadlock in Berlin, though alarming by German standards, has not been enough to shake investors’ faith that the Germans will work it out somehow.
Yet there is also an uneasy feeling that the calm could be deceptive. While Germany does not have any serious economic problems that require wrenching policy changes, it faces rising longer-term challenges like an aging work force, the emergence of China as an industrial competitor and the need to invest in digital networks and a better power grid to stay relevant.
And Germany’s voice in important European matters that lie ahead could be diminished if Ms. Merkel oversees a weak, divided governing coalition.
“There are no pressing issues for the German government to address,” said Christian Kopf, head of fixed income at Union Investment, a fund manager in Frankfurt. “But we do need a capable government to deal with the severe challenges we face at the European level in the next two years.”

Ms. Merkel, Germany’s leader for more than a decade, emerged as a major global figure in the wake of the 2008 global financial crisis. At home, she oversaw a plunge in joblessness and an economic expansion that contrasted with misery in much of the rest of Europe.

Her tenure is far from over. This week Germany’s Social Democrats were reconsidering their decision not to continue a coalition government with Ms. Merkel’s Christian Democrats. Five years of compromising with Ms. Merkel has hurt the Social Democrats among their blue-collar base. But the alliance of the two mainstream parties provided the kind of stability that business craves.
The economic outlook in Germany and Europe has not been this good in at least a decade, making the turmoil in Berlin seem like little more than background noise. The mood among European consumers is better than it has been since 2001. The eurozone economy has been expanding since 2013. In the most recent quarter, every country in the European Union grew except Denmark, where the economy shrank 0.3 percent compared with the previous quarter.
On the list of things keeping corporate executives up at night, business leaders and analysts say, the Berlin stalemate probably ranks well below other risks. More troubling for instance are North Korean nuclear arms, United States protectionism, a drift toward authoritarianism in Eastern Europe and Turkey, and Britain’s fraught attempt to work out a divorce from the European Union.

But during her 12 years in office, Ms. Merkel has largely been coasting on reforms to the labor market and social welfare system undertaken by her Social Democratic predecessor, Gerhard Schröder, at great cost to his political career.
To defend its long-term competitiveness, analysts say, Germany needs to be investing in infrastructure and its work force. With an unemployment rate of only 3.6 percent, the country will face labor shortages unless it can integrate immigrants into the work force. That will require more investment in education and training.
Corporations have a strong interest in political decisions that will be made in Brussels in coming years, such as common defense policy or the choice of a successor to Mario Draghi, the president of the European Central Bank, whose stimulus measures helped bolster the eurozone’s economy.
The twin pillars of German industry, precision machinery and automobiles, face unprecedented levels of technological change and new competition from places like China and the Silicon Valley. European governments need to respond by, for example, building charging networks to encourage an electric car industry.

“There is a deep structural adjustment process underway that requires assistance from the government,” said Ralph Wiechers, chief economist of VDMA, an organization that represents German engineering companies. “What are we producing in the future for what markets? What skills do we need to be competitive?”

Ms. Merkel has cordial if sometimes tense relations with German chief executives. She has led delegations of German business leaders to Beijing and other foreign destinations to promote their exports, and she beat back proposals that would have increased taxes.
She has been a zealous — perhaps too zealous — advocate of auto industry interests in Brussels. By fighting to dilute or delay stricter air quality standards, Ms. Merkel may have encouraged complacency among German carmakers. They did not invest enough in electric cars and risk being bypassed by Tesla in the United States or by Chinese automakers.
Other actions by Ms. Merkel have annoyed business. Her decision in the wake of the Fukushima disaster in 2011 to phase out nuclear power plants, without a clear plan to replace them with other sources of energy, has left German industry paying the highest electricity prices in Europe.

“She hasn’t done anything against business, on the other side she hasn’t done a lot for business,” Mr. Wiechers said. “There are no big programs where you can say, ‘She did this for the economy.’”
On balance, Europe’s management class would probably be sorry to see Ms. Merkel go. Europe’s economy recovery is still young, and followed almost a decade of financial crisis and recession that nearly destroyed the eurozone. Right-wing populism has been contained in Western Europe but remains a threat.
Lorenzo Bini Smaghi, the chairman of the French bank Société Générale, credited Ms. Merkel with neutralizing reactionary elements in Germany and restraining those in her party who would have gladly let the eurozone collapse rather than support it with German tax revenue.
Despite the mixed feelings that business leaders have about the chancellor, her departure amid political disorder could shake their confidence. There are no potential successors with anywhere near her track record or international stature.
“It depends on how long the uncertainty lasts,” Mr. Bini Smaghi said. “In the European business world, the role she played in the crisis to push Germany forward rather than backward is very much appreciated.”