Holiday cheer persists in Germany despite a long government transition

Largely unperturbed by Angela Merkel's failure to form a government after a September election, many Germans are taking the prospect of several more months of coalition talks in their stride.

The country is used to lengthy transitions but this is the longest since reunification in 1990. It is 87 days since the election and few experts see a government in place before March.

EU leaders fear delays to eurozone integration plans, some of which are to strengthen the banking system, and many economists warn Europe’s biggest economy must reform and invest in broadband and infrastructure to stay competitive.

But as caretaker chancellor, Ms. Merkel is voting at EU summits, parliament is passing laws required by international mandates, local authorities are wading through asylum applications, and a bright outlook in Europe's biggest economy is buoying the mood.

"I haven’t noticed much difference from before,” said Nadja Helling at a Berlin Christmas market. "It's not ideal but nobody is panicking."

Domestic and foreign demand are driving solid growth and the effects of low borrowing costs and European Central Bank stimulus are supporting record-high employment levels and rising real wages.

"We have jobs and are enjoying the Christmas markets," said Ms. Helling's friend, Silvia. "What's the problem?”

The Munich-based Ifo institute raised its forecasts last week and expects the German economy to expand by 2.6 percent next year, the highest rate since 2011, adding, however, that this might be the peak.

The IfW institute in Kiel said the delayed formation of a government "does not pose an economic risk," but also sounded a warning for the longer term.

"A boom may feel good but it carries the seeds of a crisis. The view that a boom is harmless, as long as consumer prices are under control, falls short," said the IfW's Stefan Kooths.

Little sense of crisis

The reality experienced by many Germans belies dire warnings from commentators last month about looming instability and even new elections after Merkel, weakened by losing votes to the far-right, was humiliated by the collapse of three-way coalition talks.

She is now wooing the Social Democrats (SPD), reluctant partners after voters punished them for sharing power with Merkel's conservatives over the last four years.

Germany's transition pales into comparison with some other EU partners, such as Belgium and the Netherlands where a coalition took 225 days to clinch a deal this year.

"I suspect the process will take some time yet but people who talk about instability are mistaken. We have a stable caretaker government, an effective parliament and a democracy that is functioning very well," said Nils Diederich, politics professor at Berlin's Free University.

Confounding some predictions, the far-right Alternative for Germany (AfD), dogged by infighting, has so far failed to capitalize on the lack of a proper government despite being the third-biggest party. Opinion polls have barely changed since the Sept. 24 election, indicating there is little sense of crisis.

The Ifo institute said on Tuesday uncertainty about the shape of the government was growing but that a surprise drop in its business morale survey in December after a record high the previous month was nothing too unusual.

Indeed, seasonally adjusted unemployment is at the lowest level since 1990 and Christmas sales forecasts are bright, with the HDE retail industry association expecting sales over the festive season to rise by 3 percent to a record high.

Unruffled leader

Merkel, unruffled as ever, has sought to reassure voters and investors that it is business as usual in Germany, with most incumbent ministers staying on in an interim government.

If anything, there is a striking lack of urgency about the talks, partly to keep skeptical SPD rank and file on board. After party leaders meet on Wednesday to draw up a rough timetable, no further talks are expected before January.

Meanwhile, the Bundestag lower house has agreed to roll over military missions in Afghanistan and Mali and debated topics from Brexit to planned job cuts by Siemens.

Germany's federal structure means much business that affects ordinary people, including dealing with asylum applications, housing, and school issues, goes ahead regardless of Berlin.

Deutsche Bahn has launched a much delayed fast train link between Berlin and Munich, complete with the usual teething problems, and Christmas markets have opened, albeit with tight security after last year's attack.

The impasse has had little effect on Brexit talks because there is consensus among Germany's main parties about the German, and EU, position towards Britain.

Plans for eurozone reform, however, are more contentious, although Merkel said on Monday, she hoped to make progress on the issue by March.

"The main possible negative effect is that the momentum in Europe (for reform), that was desired after the Brexit vote might be lost," said Thomas Jaeger, politics professor at Cologne University.

The SPD, determined to stamp its identity on any coalition deal with Merkel, backs deeper integration than Merkel's conservatives, but is split over whether it should agree to a 'grand coalition' with Merkel.

Its leader Martin Schulz has championed French President Emmanuel Macron's proposals for a eurozone budget and finance minister and wants a "United States of Europe" by 2025.

"The only political crisis in Germany is the struggle for direction by the main parties, in particular the SPD,” said Mr. Diederich. "The SPD needs time to overcome this." 

This story was reported by Reuters.