Europe's fudge will go on following German vote

Angela Merkel fell short of winning an absolute majority. Now the markets must wait to see what form the German government takes.

European politics seems to have been on hold for months ahead of last Sunday's German elections. But now it looks as though it could still be some time before the continent's towering in-tray gets tackled. Chancellor Angela Merkel's centre-right CDU party scored a resounding victory, but fell short of an absolute majority. She will have to find a coalition partner, most probably the Social Democrats.

But they will drive a hard bargain and negotiations are likely to be protracted, says Holger Fahrinkrug of Meriten, part of BNY Mellon. "A period of uncertainty will follow and this could last months rather than weeks." The last time she formed a grand coalition with the Social Democrats, in 2005, the talks took 65 days.

Once she gets round to the eurozone crisis, one of the most pressing tasks will be a third bail-out for Greece, says Der Spiegel. It needs around €11bn over the next two years. Athens is drowning in debt and won't be able to grow its way out. Then there's a likely new bail-out for Portugal to worry about, while Slovenia's banks are bankrupting the country. A European banking union, which would convince markets that the continent as a whole could shore up its decrepit banks, is still largely on the drawing board.

The big picture, meanwhile, is that Germany's approach to euro crisis management is unlikely to change. With the German population and establishment hostile to fiscal transfers from core to periphery, don't expect the debt relief the latter needs. There will probably be inadequate fudges, such as extending the maturity of loans and reducing interest rates instead, says Wolfgang Munchau in the FT. Everything will be tackled. Nothing will be resolved.

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