Merkel’s political alliance hangs in the balance

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German Chancellor Angela Merkel’s power base appears to be hanging on a thread after the leader of her long-term coalition partner reportedly offered to resign because of differences over immigration.

The potential resignation of Horst Seehofer, the interior minister and head of the Bavarian-based Christian Social Union (CSU) which partners Merkel’s Christian Democratic Union (CDU) in a coalition with the Social Democratic Party (SPD), puts Merkel in a vulnerable position and raises the prospect of another election in Germany.

The CSU has pushed Merkel for a tougher immigration policy and last week Seehofer said Bavaria could turn migrants back at the German border, putting him on a collision course with the German leader. On Sunday, he also said that Merkel’s latest deal with EU countries on migration was “ineffective.”

As the difference in positions emerged, Seehofer reportedly offered to step down from his ministerial post and as leader of the CSU on Sunday evening. However, he was persuaded by CSU officials to make a last-ditch effort to resolve his differences with Merkel, according to reports, and the two will meet Monday.

“We’ll have more talks today with the CDU in Berlin with the hope that we can come to an agreement,” Seehofer told reporters just before 2 a.m. local time Monday, according to media reports. “After that, then we will see.” For her part, Merkel told broadcaster ZDF Sunday that she agreed with Seehofer over the need to reduce the amount of migrants coming to Europe, but how to achieve this was where the differences lie.

Economists and analysts have been left wondering what the Merkel-Seehofer spat means for Germany’s political outlook.

“The risk remains serious that the CSU may leave Merkel’s government,” Holger Schmeiding, chief economist at Berenberg bank, said in a note late Sunday evening, adding that it was worth pondering the potential “what if” consequences.

“As long as Merkel does not herself choose to resign, she could stay on as chancellor of a minority government,” he said. Another possibility was that the crisis could weaken Merkel‘s standing at home and her influence in Europe and beyond, Schmeding noted.

But he believed that new elections are an unlikely prospect for several reasons. “Against the will of the reigning chancellor, it is almost impossible to call early federal elections in Germany,” he said.

“(Merkel) could stay on as chancellor until parliament elects a successor supported by a majority in parliament. That the other parties ranging from the ultra-right AfD to the Left Party would agree on a successor to Merkel and outvote a CDU-SPD coalition seems virtually impossible,” he said.

A new election would not be welcomed by Germans or financial markets given the fact that it took Germany around six months to form a government after its last election in September. A German business representative told CNBC that the spat was an unwanted distraction from other matters facing Germany – like the prospect of trade tariffs with the U.S.

“The situation that has developed over the weekend is serious, so serious that we haven’t seen this is decades, it’s a serious fight over how to handle migration in Germany, but also on a European level,” Joachim Lang, the director general of the Federation of German Industry, told CNBC Monday.

“This is really time consuming and it really is necessary to decide these issues when there are more issues to discuss and take care of,” he added.

The political upset for Merkel comes after apparent success at a wider EU-level just days ago. Sixteen EU nations met for a mini-summit last week to discuss migration, agreeing that tighter borders were necessary after several years of mass migration to Europe from the Middle East and Africa.

The EU’s 28 members then met for a summit in Brussels last Thursday where Merkel struck a deal with 14 countries that means migrants must return to the country where they had initially made asylum applications, in order to prevent “secondary migration.” The deal, which requires bilateral agreements between countries to be implemented, was hailed as a breakthrough but is seen as short on detail.

The need to deal with migration to the continent is pressing amid a rise in right-wing, anti-immigrant sentiment among voters. In Germany, the Alternative for Germany (AfD) party, which espouses such views, has seen a dramatic rise in popularity largely because of Merkel’s open-door approach at the height of the migration crisis, when over a million migrants entered the country in 2015.

Beat Wittmann, a partner at investment consultancy Porta Advisors, told CNBC Monday that politicians like Merkel had to adjust their migration policies or face a voter backlash. He did not think the CDU-CSU alliance would survive. “The problem is that Germans, on average, would like to have Merkel in charge but they would like to have CSU policies on immigration and that’s the problem right now and that’s the problem throughout the euro zone.”

Merkel would win a confidence vote should the CSU leave the conservative alliance, Whitmann believed, but said that policies to manage immigration needed to be adjusted nonetheless, “otherwise voters will leave the established parties.” He believed that the EU deal reached over the last few days would not succeed, ultimately. “It’s short of implementation detail, it’s a quick fix on paper but it won’t last in reality,” he added.

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