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Many observers expect the German elections on Sunday to result in a third mandate for Angela Merkel but with a switch in government coalition partner from the more free market liberals of the FDP to the Social-Democrats. Jack Ewing in yesterday’s New York Times writes that Merkel’s hand may be “forced” into a so called grand coalition between Germany’s two biggest parties.

The German elections matter for the more than 300 million people in the Euro area as they will shape the leadership for resolving the crisis. Angela Merkel has received heavy criticisms for her record: Joschka Fischer deplores a lack of vision, courage and strength of purpose. The columnist Wolfgang Munchau claims that the Euro cannot work with a German macro-economic policy. And Jürgen Habermas writes about a Germany dozing on a social volcano and shirking its responsibility. But could Merkel have adopted a radically different approach over recent years?

Exercising leadership is about disappointing your people at a rate that they can absorb, Marty Linsky says. Clearly, disappointment in Germany with the Euro has increased over recent years, partly fuelled by populist media playing on Mediterranean stereotypes, and partly by disagreements over the meaning of past EU commitments. While innovating for the management of the Euro crisis, Merkel had to disappoint her coalition partner in government, the Bundesbank, some within her own party, and a vocal part of public opinion.

Moreover, at exactly the same time when key decisions were needed in Europe, Merkel was walking on a tightrope in Berlin, for instance at the key moment in the Fall of 2008 when a German bank rescue and guarantee package needed approval, in combination with a German mini-stimulus that included subsidies for not firing employees and a cash for clunkers programme. German budget “austerians” seized this increased spending as a chance to push for the public debt brake in a revising of the Constitution.

German federalism has indeed continued on an important shift under Merkel, departing step-by-step from a 1960s Keynesian deal that strengthened the federation and helped weaker Länder spend and invest above their own fiscal capacity. It became a system with less solidarity and more self-reliance for backward economies. Could the Chancellor have departed in Europe from the prevailing national philosophy on a burning political issue that opposed Länder politicians? Would she not have taken too high a risk, with subsequent uncertainty for Europe as a whole, even if she had wanted to?

The above may not be optimal policy-making for the Euro. But it is about politics and the need to exercise leadership in alliance with others within Germany. EU observers cannot just look at the policy problem that needs to be tackled and the leaders doing that tackling. Domestic institutions and internal party logics matter. The make-up of the next German government will therefore be crucial for the Euro-zone. Florence Autret who recently published a biography of the Chancellor says that Merkel may actually prefer a grand coalition, contrary to the thesis that Sunday’s results may “force” her hand. The reason for this may well be that ruling with the FDP raises more expectations within part of Merkel’s party on fiscally conservative, free market oriented policies, and puts therefore more constraints on the Chancellor in exercising leadership.