German elections – post-merkel, what next?
#Articles — 21.09.2021

GERMAN ELECTIONS – POST-MERKEL, WHAT NEXT?

Guy Ertz

Vaccines, recovery and reflation

Summary

§  Germany’s next federal elections will take place on Sunday 26th of September. Recent polls suggest an increased likelihood of a government led by the Social Democrats (SPD). Around 40% of voters remain undecided.

§  In the event of an SPD victory, we would see the odds increasing for a “traffic light” coalition with the Greens and Free Democrats, although a “Jamaica” coalition with the participation of the Christian Democrats instead of the SPD would still be possible.

§  All parties will want a new government in place ahead of France taking over the rotating EU Council presidency in January and French Presidential elections in April.

§  Fighting climate change and focusing on infrastructure expenditure programs seems quite consensual. Most other topics split SPD/Green compared to CDU/CSU and Liberals. All in all, these coalitions are growth friendly for Germany and the Eurozone.

§  Regardless the outcome of the election, the effect on politics should be limited. Indeed, the German political system is highly consensual as most of the key issues need the approval of the second chamber of parliament (the “Bundesrat”) where all parties except the rightwing AfD are involved.

Potential “Traffic Light” Coalition 

Germany’s next federal elections will take place on Sunday 26th of September. Recent polls suggest an increased likelihood of a government led by the Social Democrats (SPD), but the outcome remains uncertain. Television debates with the three main candidates (SPD, Greens and CDU/CSU) clarified positions but did not lead to a major shift in opinions. The latest debate on Sunday 19 did not bring any major surprise. Probabilities were not really affected by this event. Should the SPD win, we would see the odds increasing for a “traffic light” coalition with the Greens and Free Democrats, although a “Jamaica” coalition with the participation of the Christian Democrats instead of the SPD would still be possible (see charts below).

 

At this stage, we do not think an all-left coalition (SPD-Green and Left party) is very likely. Scholz’s and the Green’s view of some radical positions (related to the NATO and EU) held by the Left party make such a coalition unlikely. The left wing of the SPD would be happy with such a view, but we expect the internal balance to shift to Scholz in case of an SPD victory.

The option has however not been officially ruled out for two main reasons (1) Not alienating voters and (2) as a bargaining tool during the formation of a coalition.

According to a recent poll published on September 14, around 40% of voters remain undecided over which party to vote for. Participation should be high. The SPD retains a small lead for now, but the high share of undecided voters suggests that the race remains quite open.

While there seem to be a consensus on the first two issues, there are major divergences in opinion on the others. Globally speaking, SPD and Green and to some extend the Left party defend similar positions. The opposite is true for the FDP and to some extend the CDU/CSU.

An SPD-led government would support our view of a more growth-friendly fiscal policy in Germany. An SPD-led government would also increase the chances for a loosening of European fiscal rules.  In such a scenario, the CDU/CSU, especially as an opposition party, would probably oppose changes like the debt brake and stick to its core values of fiscal discipline. The Greens would look to get around the debt brake rather than loosen it.  This could be done via setting up an off budget special purpose vehicle.

Keeping in mind the most probable election outcomes (see charts), the effects on politics and global economic growth should be limited. Indeed, the German political system is quite consensual, as most of the key issues need the approval of the second chamber of parliament (the Bundesrat). This chamber represents the governments of the states (“Bundesländer”) where all parties except the rightwing AfD are represented.