Germany's eurosceptics sow the seeds of turmoil

Should we be worried by the Alternative for Germany? In federal elections held last year barely six months after the eurosceptic party was founded, the AfD came within a whisker of claiming 5 per cent of votes cast - the threshold it needed to cross to win representation in the Bundestag. In European elections held this May, the AfD won 7 per cent, and in the three state elections that have been held since then, it has done even better.

The answer is: yes, we should be worried. But the reasons are not all that obvious. True, the AfD advocates a German departure from the eurozone; but that is easier said than done. Its leader, Bernd Lucke, a professor of economics, has been one of the loudest critics of the German government's efforts to rescue the eurozone. He is also scathing in his criticism of Mario Draghi, president of the European Central Bank.

As the only avowedly anti-euro party in Germany, the AfD is filling a niche in the political spectrum. In itself this is not a worry. A recent opinion poll put the party's potential support at 22 per cent. Its rise has coincided with the decline of the liberal Free Democratic party, whose support collapsed in last year's federal elections and has not recovered since. Among the FDP's traditional supporters were conservative nationalists. Many of them have defected to the AfD because it has clearer conservative credentials.

The AfD's attraction goes beyond its advocacy of a euro exit. In recent regional state elections, the euro has hardly been an issue. The party succeeded this time by embracing conservative values. It advocates an end to immigration, more support for families and less social spending. This poses a danger to Angela Merkel, the chancellor, and her Christian Democrats.

Unlike other postwar rightwing parties, the AfD's appeal extends well beyond the fringe. The party has, by and large, managed to keep a distance from extremists. It is always possible that it will implode; there has been much infighting over the past year. But so far Mr Lucke has held it together.

There is no chance of the AfD becoming a junior partner in government. Ms Merkel has ruled out any coalition with it, as have all the other parties. But senior CDU politicians are worried. The AfD is already influencing policy.

It is no coincidence that the German government is once again talking tough with the rest of the eurozone. Last week we heard that Wolfgang Schauble, finance minister, had criticised the ECB's programme of private-sector asset purchases. He rejected the central bank's suggestions that governments should guarantee asset-backed securities - financial instruments that transform loans into tradable paper. He rejected a proposal that would have diverted funds that were originally intended to prevent financial speculators from attacking the bonds of eurozone governments, releasing them for the broader purpose of boosting investment.

Markus Soder, finance minister of the conservative-run state of Bavaria, was even more outspoken, arguing that an EU investment programme would end up stimulating support for the AfD. The German government is reverting to its previous habit of saying "Nein, Nein, Nein" to its eurozone partners. At least in part, this is because the AfD is breathing down its neck.

The AfD is biding its time. It believes, probably correctly, that the euro crisis is likely to return, at which point it will press for Germany's departure from the eurozone. None of this has yet arrived on the radar screen of international investors, who have reverted to the pre-crisis habit of treating all eurozone debt as equivalent. They take the ECB's conditional guarantee that it will act as a lender of last resort - which is subject to a legal dispute - as a permanent and unconditional bailout guarantee.

One reason for the current stability in financial markets is the high degree of what you might call constructive ambiguity regarding Germany's willingness - and the ECB's ability - to bankroll the system. The AfD will bring some unhelpful clarity about the limits of Germany's engagement. The rest of the eurozone might be in for a shock.

One place where trouble might strike is the sovereign bond market. I am hearing increasingly the view that we should ignore debt ratios, notably that of debt-to-gross domestic product, as a metric for debt sustainability. We should instead focus on affordability - debt service costs as a ratio of fiscal revenues. At present these are quite low, because bond yields are low. Those who tell us not to worry about debt ratios are telling us that good times will go on forever.

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The AfD only needs to create doubt to upset this equilibrium. It does not need to win an election or become part of a government. Its strategy will be to test the limits of Germany's commitment. That strategy stands a fair chance of success. And when that happens, it will wreak havoc.

munchau@eurointelligence.com

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