BERLIN—Germany’s parliament on Wednesday elected Angela Merkel to her fourth and likely last term as chancellor, presenting her with some of the toughest domestic and international challenges in her 12 years in power.
As she heads a fractious government of political opposites whose popular support is waning, Ms. Merkel will have to fend off economic threats from the U.S., address neighbors’ demands for European Union reform, and try to preserve political and social cohesion in a country being tested by an unprecedented inflow of migrants.
Ms. Merkel’s renewed grand coalition between her conservatives and the Social Democrats is beginning under the threat of a trade war. With President Donald Trump at its helm, the U.S. has turned from Germany’s closest post-War partner into a rival.
Mr. Trump has piled criticism on Berlin for the country’s vast trade surplus and its meager defense spending, demanding it decrease the former and turbocharge the latter, neither of which Ms. Merkel’s coalition has any intention of doing.
Mr. Trump’s recent threats that Washington could impose a 25% levy on European car imports hits at Germany’s flagship industry and at the heart of its export-oriented economic model.
Ms. Merkel so far has shown little appetite for confrontation. While the European Commission, officially in charge of trade matters for the entire EU, has echoed Mr. Trump’s belligerent language, the chancellor has called for dialogue to resolve the dispute—even as she offered no concession.
The chancellor has spoken of the need to spend more on defense. But while the latest budget foresees a gradual increase in spending, it will not be enough for Germany to hit the North Atlantic Treaty Organization’s goal of 2% of GDP, which Mr. Trump insists on, any time soon.
Polls show the vast majority of Germans oppose higher defense spending and her left-leaning coalition partner, the SPD, is certain to block any big rise.
After almost a year of absence from the international stage during the electoral campaign and the protracted coalition talks that followed, Berlin must now take a position on demands by French President Emmanuel Macron for radical reform of the European Union.
Mr. Macron outlined an ambitious set of proposals that would require higher German spending and sharing of financial risks—neither of which are popular in Europe’s largest economy. His agenda includes a common budget and joint finance minister for the eurozone, the group of countries using the euro currency, as well as a push to complete a plan that would share the cost of protecting savers’ deposits in case of a banking crisis.
While the Social Democrats have made positive noise on the French proposals, Ms. Merkel remains non-committal. The coalition agreement is notably vague on the issue, leaving the chancellor some margin of maneuver. But aides have been pouring cold water on Paris’ hopes of major concessions.
In a sign that she accepts the urgency of starting the conversation, however, Ms. Merkel will travel to Paris on Friday with her new finance Minister Olaf Scholz of the SPD to meet their French counterparts.
France’s finance minister Bruno Le Maire acknowledged it wouldn’t be easy to agree on reforms even if they are necessary to recharge public support for the EU.
“There is now a small window of opportunity,” Mr. Le Maire said. “We need to strengthen the euro area in good times so we can face bad times.”
More than in her previous terms, Ms. Merkel will have to contend with domestic headwinds.
The 2015-2016 migration crisis, in which more than a million asylum seekers streamed into the country, played a major role in her disappointing election results. It also helped propel the five-year-old Alternative for Germany, a strident anti-immigration movement, into parliament as the largest opposition party.
The SPD’s pro-immigration views will be tough to reconcile with those of many in Ms. Merkel’s party as the government starts work on the first comprehensive immigration legislation in two years.
The Interior Minister from Ms. Merkel’s conservative bloc, Horst Seehofer, set the tone this weekend when he announced a “master plan” for deporting rejected asylum seekers. Over 200,000 immigrants are marked for deportation in Germany.
Ms. Merkel will also have to ensure the succession battle that has begun within her CDU doesn’t damage the party. The CDU is torn between a conservative and immigration-skeptical right wing and the guardians of Ms. Merkel’s centrist heritage.
The SPD, which is polling at a historic low of 18%, has made it clear it would be no cozy partner.
“We must be a clear opponent… from the outset, both in government and outside of it,” Ralf Stegner, the party’s vice-chairman, said this week.
Write to Andrea Thomas at andrea.thomas@wsj.com and Bertrand Benoit at bertrand.benoit@wsj.com
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