Surprise election results have thrown Germany’s usually staid political scene into chaos and raised questions about the future of Angela Merkel’s leadership.

Fiercely moral. Shrewd political survivor. Cool-headed pragmatist. This is how some have described Angela Merkel, the incumbent German chancellor. Merkel has held office since 2005, recently winning her fourth consecutive term in the post.

Parliamentary election results showed a shift in German favoritism and an incline towards change. This means polls have highlighted that although Germans do not favor a change of their chancellor, they still favor overall change in policies given that no major domestic reform has been enacted in the past 12 years.

On September 24, the German parliamentary election results were marked with a combination of victory and disappointment. Despite Merkel’s victory, the Christian Democratic Union (CDU) bloc she leads lost 20 percent of its seats, securing only 33 percent of votes. Her long-time partner, the center-left Social Democratic party (SPD party), incidentally announced its intention to move to the opposition given its successful closing of 20.5 percent of votes. The party is currently headed by Martin Schulz, who is a former EU president and his policies diverge fairly significantly from Merkel’s.

The popularity of the right wing populist party, Alternative for Germany (AfD), stunned the political establishment. The AfD campaigned vehemently against Merkel’s open immigration policy. The party secured 12.6 percent of votes and 93 seats, making it the first time in 60 years for a far-right party to make it to parliament.

In November, Merkel found herself unable to form a coalition, leaving Europe’s biggest economy without a fully functioning government. So what impact might this uncharacteristic uncertainty have?

On the Monday following the election results, global stocks and the European stock market exchange fell and the euro dropped due to concerns over the stability of Germany’s government and economy. According to analysts, the initial reaction from the market to the election was negative. Because Merkel’s victory was not a particularly dominating one, the euro dropped more than 0.8 percent against the dollar.

Nevertheless, Merkel’s victory was still welcomed by investors, and stability has since procured in the markets. The euro is more likely to be impacted by any policy moves from the European Central Bank.
The German economy has been performing strongly compared to its EU member peers.

Growth continues to increase (albeit moderately), employment levels are at a record high and German corporations are highly optimistic on their performance for the next two years. Many analysts are predicting that 2017 will overall be a good year for the German economy, even if the third quarter was weaker than the first two.

With increased spending by the government and individuals, Germany’s economy grew 0.7 percent in the first quarter of 2017 and 0.6 percent in the second and third quarters, in line with expectations. Leading economic institutes have raised their growth forecast for the German economy to 1.9 percent in 2017 and 2.0 percent in 2018.

Germany’s unemployment rate has halved in a decade, reaching 3.6 percent as of September 2017, and is one of the lowest rates in the EU. Its workers are among one of the world’s most productive, especially in terms of education and vocational training.

Manufacturing output rose by 4.3 percent in September, its biggest rise since March 2010. Manufacturers of cars and other vehicles were the main driver behind the surge, as industrial production had gained momentum since the start of the year and is expected to continue its upswing.

Traditionally, Merkel follows tight fiscal policies and limits spending to be able to increase investments in digital and physical infrastructure. Germany ran a current account surplus of 8.4 percent of GDP in 2016; it argues that this surplus is driven by the weakness of the euro as a result of competitive German goods and the European Central Bank’s policies.

Merkel believes that saving less would mean more public and private investment, which would consequently improve productivity in the future. This comes as a result of her fiscal policies from her last term, which involved balancing the federal budget and prompted criticism that Germany is jeopardizing its future by overlooking public investment. For example, government share of total investments stood at 10.7 percent in 2016, making it one of the lowest rates in the EU.

The pragmatic balance between shaping an open-minded immigration policy and the security of Germany is what will be critical for Merkel for the coming years. To do this, she is tapped to follow a milder policy to help undermine the security threat the country and the rest of the EU have seen in the past few years following a relaxed immigration policy.

This policy was enacted recently, where Merkel agreed to cap the number of refugees Germany accepts at 200,000 annually based on “humanitarian reasons” in a concession to her conservative allies. The Christian Social Union (CSU), sister party to the CDU, has long pushed for a ceiling on the number of refugees but Merkel kept resisting. Although she later conformed to the request, the number still might change.

Merkel’s open door policy saw Germany receive almost one million refugees and migrants in 2015. Experts said the 200,000 target was not an unrealistic one; migrants arriving in Germany last year fell to approximately 280,000 and are expected to drop further this year. This refugee cap deal can therefore be interpreted as mainstream conservatives yielding to the demands of supporters.

The CDU and CSU also agreed on an immigration law to help differentiate between asylum seekers and job-seeking migrants, which would give priority to migrants that have a competitive advantage in benefiting the economy. This policy has the support of most other parties (except the AfD, of course).

The result of the parliamentary elections was marked by a rise to power of parties wishing to vigorously defend national interests of the European Union. According to analysts, the election results are unlikely to have a significant impact on the EU and even small implications for Brexit.

With the exception of the AfD, there are few differences between parties when it comes to European integration, and European relations were not featured heavily in the campaign. The new government is expected to take a more cautious approach to further integrate with European nations.

For example, the CDU and the Free Democratic Party (FDP) support a strengthening of the EU’s external borders and the promotion of new deals with neighboring European countries, including Turkey. However, the FDP have ruled out supporting fiscal transfers between EU member states, which might muddle with Merkel and French President Emmanuel Macron’s plan for further integration in the Eurozone.

Because Merkel failed to form a coalition in November due to failure of negotiations with the FDP and other parties, this currently deprives Europe of the stability many hoped it would gain from the German election in the short-term.

Overall, however, the historical success of Merkel’s relationship with EU and Eurozone member states is likely to strengthen moves towards further European integration, particularly in issues related to economics and security.

The tension between the two powerful European nations, France and Germany, has long been established. Britain played a crucial role as a balancing power for the Franco-German relationship that constitutes the core of European politics. With the ongoing demands of Brexit, the friction between France and Germany will need to be settled unaided.

Moreover, the problem was not that Germany was too strong, it was that France was too weak under President François Hollande. Now, the victory of President Macron creates an exceptional opportunity for change and ambition, which Germany lacks today given its confidence at status quo.

The root of tension between both nations is their contrasting understanding of economics and politics; the French traditionally drew on the Keynesian tradition, in which the involvement of the government provides the proper planning and management to allow large-scale public expenditure. This would avoid cyclical crises, which in turn would protect large corporations. They lacked strength in domestic reform. Germany, on the other hand, avoided public-sector interventions and aimed to support a broad group of medium-sized enterprises rather than just large corporations.

Today, Macron supports “European sovereignty” and is willing to accept greater risk-sharing in the EU, which Germany has been shying away from. However, Macron wants to push through radical reforms of the EU as he argues that closer cooperation between member states would make Europe stronger and more stable. Merkel is willing to work with Macron on finding a consensus for reform.

A growing imbalance between both nations within the EU can increase the uncertainty about the future of not only Europe, but for the world as well. Europe’s two great powers are a boon to the economy and the region’s geopolitical stability; as such, an equilibrium and a compromise in the Franco-German relationship (without the support of Britain) is essential.

Both Merkel and Macron can lead Europe together, on equal footing, as per their similar liberal democratic ideologies. The involvement of smaller European nations can add more opportunities for cooperation, which Germany will need to accept.

The German political system strongly favors government coalitions. In November 2017, a breakdown in coalition talks drove the country into a political crisis. The FDP liberals pulled out of talks with Merkel’s CDU/CSU bloc and the Greens. FDP leader Christian Lindner said there was “no basis of trust” between him and Merkel. He said that while the FDP knew it could not lead Germany with just 11 percent of the vote, the parties involved in talks argued on their visions of the future of Germany in terms of tax, immigration, and environmental policies. At the same time, the SPD ruled out joining Merkel’s bloc.

As a result, Merkel faces her biggest challenge in 12 years as Chancellor, but does not choose to resign from her post. A future effective government would have significant implications for fiscal expansion and the rebalancing in Europe. As such, Merkel has only a few options for the future of her government. She can hope to change the mind of SPD leader Martin Schulz to create a grand coalition between the CDU/CSU block and the SPD.

She could form a minority government with another party, such as the Greens, though this would signify a compromise of many of her policies to fit with those of the other. Or simply, she could hold elections for an entirely new government. This will need to be called by Germany’s President Frank-Walter Steinmeier and the process could take months.

The impact of the German elections and a future coalition is limited as it is more of a domestic political story than a regional European one. This will be Merkel’s final term and it is not clear who will be her successor. The AfD will have a dramatic impact on Merkel’s foreign policies, especially in regards to immigration, trans-Atlantic relations with the US, and foreign policies with Russia and the EU. Additionally, with an imbalanced Euro zone, Brexit and a political dichotomy with the other parties, Merkel has a lot of work to do for the next four years.