It's the economy, stupid.

One mantra in U.S. politics is that electoral outcomes are greatly conditioned by the state of the economy (the Carvillian "it's the economy, stupid"). I don't think that German elections are as closely coupled to the economy as in America--in the "grand coalition state" it is more difficult to disaggregate responsibility than in a presidential system with single party control of the executive branch--but the state of the economy and the federal government's management thereof certainly will affect voters' choices. This is especially true in 2009 in the midst of the worst financial and economic crisis in living memory. How will the Merkel government's economic management affect the outcome of the Bundestag election on September 27th?

On the face of it, the situation is still bleak. GDP contracted by 6.9% in the first quarter of 2009 and overall the economy will contract by 5-6 % this year. Unemployment is starting to creep up, currently at 8.3%. Moreover, the stimulus packages passed in late 2008 and early 2009 (according to a Brookings study representing about 3.4% of 2008 GDP) will create budgetary, inflationary and fiscal challenges down the line. It is interesting to note that this is one of the larger packages cross-nationally (dwarfing those of France or the UK).

Despite these efforts, the German government was vociferously criticized for not doing more. Especially influential New York Times columnist Paul Krugman, lambasted the grand coalition's overly timid and presumably short-sighted response (Der Spiegel article). Merkel's seeming unwillingness to support greater domestic and EU stimulus spending or bailout packages for several struggling East European countries earned her the derisive nickname "Madame Non" in France and elsewhere (RealClearPolitics article).

But then by the high summer of 2009, things have begun to look up. The U.S. economy and stock markets stabilized. China was back to double digit growth rates. GDP contraction in Germany slowed and the economy may grow again by the third quarter of 2009. The unemployment rate will continue to increase, but probably only marginally. Business confidence is up and manufacturing is recovering. The heavily-hit car makers are even returning to full production and employment. Consumer spending is holding constant.

Moreover, despite all of the criticisms of Merkel's policies, a study from the Boston Consulting Group concluded in late July that the German stimulus package was the most successful in international comparison (Der Spiegel). Particularly the "cash-for-clunkers" (Abwrackprämie) program-- subsequently much copied in the U.S. and elsewhere--has boosted consumption and has helped the struggling auto industry. In addition, the still-too-often underestimated chancellor has been adept at blaming the global downturn on the Anglo-American neoliberal model, tapping also into rather widespread anti-Americanism. Merkel has brilliantly relegitimized Modell Deutschland or Rhineland capitalism, the core component of any German national pride. Of course, as the most recent issue of the Economist makes clear, the worst may have been averted, but there are still deep structural issues that will have to be confronted--labor market rigidities, over-reliance on exports (and the concomitant weakness of domestic consumption), and bureaucratic hindrances to starting new firms.

But these deeper issues will not affect this year's election. From a short-term economic perspective, things are looking good for Merkel and her CDU/CSU on September 27th. But, the complexities of the German electoral system, the possibility of more bad economic news, surprises and scandals in the campaign, and Merkel's record of lackluster campaigning generate a lot of uncertainty. Certainly, President Obama's confidence in her re-election is premature (Reuters).