Germany: Vorsprung Durch Merkel?
Germany’s general elections on Sunday produced a victory for the Christian Democratic Union (CDU), which now looks set to form a coalition with the centre-right Free Democrats (FDP). The two parties would have a parliamentary majority of 42. This will bring to an end four years of the ‘Grand Coalition’ between the CDU and the Social Democrats (SPD).
Negotiations are still to take place between the CDU led by Chancellor Angela Merkel and the FDP, but I expect any coalition agreement to include key FDP demands for tax cuts, a tight rein on spending and business-friendly labour market reforms. All of these measures will help competitiveness over the medium term, even though there will likely be a short-term cost to the fiscal situation.
The main theme of election night was that both the CDU and SPD had pretty bad elections. The CDU shed 1.4% of the popular vote, but crucially the SPD saw 11.2% of voters flee the party. It was the worst centre-left performance since World War 2. The big winners of the night were the FDP, which continues to perform well amongst the self-employed and small businessmen, while the hard left Die Linke made further gains amongst disenchanted voters in the old East German states.
Risk Watchdog will be carefully guarding against the following risks:
• Short-term, low risk: CDU and FDP can’t agree terms. Should this happen, then this would open up a whole can of worms, and potentially lead to another Grand Coalition. This would be bad for political stability, policy continuity and economic reform.
• Medium-term, medium risk: CDU-FDP administration slumps in popularity. With the rise of five-party politics, a decline in support for the two centre-right parties could make it more difficult for a two-party administration to be formed at the 2013 elections. This would open the door to either another grand coalition or a three-party pact, which would enhance the political risk environment.
• Long-term, low-to-medium risk: SPD can’t retain its footing. The SPD suffered badly during the Grand Coalition as it was unable to fully and publicly oppose policies unpopular with its base which were implemented by the CDU. If the SPD is unable to rebuild its position in opposition, it could potentially be eclipsed by Die Linke and the Greens. This left-wing fractiousness would strengthen the hand of the business-friendly centre-right, but lead to noisier demands for higher levels of social intervention.