Election Result: Grand Coalition Still Likely

BMI View: Our expectations of a grand coalition between the centre-right Christian Democrats and centre-left Social Democrats have been reinforced by the results of Germany's September 22 federal election. The policy mix of such a coalition would be very similar to the previous government, albeit with greater scope for disagreement on fiscal and energy policy.

We see several key takeaways from Germany's September 22 federal election result:

  • The strongest result for Christian Democrats (CDU-CSU) since 1990 reflects widespread support for Chancellor Angela Merkel's leadership.

  • The CDU-CSU has insufficient seats to form a majority government, making a coalition between the CDU-CSU and centre-left Social Democrats (SPD) the most likely outcome.

  • Failure of the Free Democrats (FDP) to pass the 5% threshold leaves the CDU-CSU as the only right-wing party in the Bundestag.

  • Eurosceptic Alternative for Germany (AfD) performed stronger than polls suggested, narrowly missing the 5% threshold.

  • Policy trajectory under a grand coalition would be similar to the previous government, although with more disagreement over fiscal and energy policy.

While the result has been heralded as a resounding victory for Merkel's CDU-CSU, which won 41.5% of the total vote, the failure of the FDP to breach the 5% threshold for parliamentary representation means that Merkel must now seek a new coalition partner. The mostly likely contender is the SPD, since the other two parties which achieved Bundestag representation - the Greens and Die Linke - appear too ideologically distinct from the Christian Democrats to form a workable coalition.

Not Quite Enough For Majority
Germany - Provisional Result of September 22 Federal Election, Seats

BMI View: Our expectations of a grand coalition between the centre-right Christian Democrats and centre-left Social Democrats have been reinforced by the results of Germany's September 22 federal election. The policy mix of such a coalition would be very similar to the previous government, albeit with greater scope for disagreement on fiscal and energy policy.

We see several key takeaways from Germany's September 22 federal election result:

  • The strongest result for Christian Democrats (CDU-CSU) since 1990 reflects widespread support for Chancellor Angela Merkel's leadership.

  • The CDU-CSU has insufficient seats to form a majority government, making a coalition between the CDU-CSU and centre-left Social Democrats (SPD) the most likely outcome.

  • Failure of the Free Democrats (FDP) to pass the 5% threshold leaves the CDU-CSU as the only right-wing party in the Bundestag.

  • Eurosceptic Alternative for Germany (AfD) performed stronger than polls suggested, narrowly missing the 5% threshold.

  • Policy trajectory under a grand coalition would be similar to the previous government, although with more disagreement over fiscal and energy policy.

While the result has been heralded as a resounding victory for Merkel's CDU-CSU, which won 41.5% of the total vote, the failure of the FDP to breach the 5% threshold for parliamentary representation means that Merkel must now seek a new coalition partner. The mostly likely contender is the SPD, since the other two parties which achieved Bundestag representation - the Greens and Die Linke - appear too ideologically distinct from the Christian Democrats to form a workable coalition.

Not Quite Enough For Majority
Germany - Provisional Result of September 22 Federal Election, Seats

However, there seems to be little support among SPD members for another grand coalition with the Christian Democrats, which is unsurprising given that the party's support has yet to recover from its last grand coalition (2005-09). Moreover, back in 2005 the SPD won only four fewer seats than the CDU-CSU, compared to 119 fewer this time around, implying that if it did enter a grand coalition it would have much less influence over a Merkel-led government than previously.

Nevertheless, the only other viable options (barring another election) are a minority CDU-CSU government, or a left-wing coalition between the SPD, Greens and Die Linke (a so-called Red-Red-Green coalition). The former would be the first minority (and single party) government in post-war Germany, and given how difficult it would make policy formation we believe it is a highly unlikely scenario. Indeed, Merkel would probably prefer a coalition with the Greens or another election than a minority government. As for a Red-Red-Green coalition, the SPD has already ruled out forming a government with Die Linke, since the parties remain far apart on almost all major policy issues, implying that this scenario is also highly unlikely.

Policy Mix Of Grand Coalition

In short, a grand coalition between the CDU-CSU and the SPD remains the most likely outcome, and as we recently outlined ( see 'Election Primer: Merkel Chancellor, Grand Coalition Likely', September 18), we would expect the policy mix to be broadly similar to that of the previous centre-right government. Below we outline our policy expectations on key issues:

Fiscal: Calls from the SPD for higher tax and spending (financial transactions tax, tax increase for top earners, statutory minimum wage), but majority of proposals torpedoed by CDU-CSU. The SPD has run on a platform of higher taxes and current expenditure, but Merkel has pledged not to raise taxes. A tax hike would be very unpopular with the electorate, and also unnecessary given the improving economic outlook. If the CDU-CSU does give ground it will likely be on the expenditure front, although with limited risk of diverging from the fiscal consolidation path.

Energy: More disagreement on energy policy, specifically in the areas of shale gas fracking, renewable feed-in-tariffs and the level of government intervention in prices. The main divergence on energy policy between the SPD and CDU-CSU is the level of regulation for the sector. Broadly speaking, the SPD is strongly in favour of greener policies, while at the same time shifting more of the cost from consumers onto big businesses. While Merkel will remain committed to boosting the use of renewable energy, her party will continue to seek ways to ease the cost of this policy in order to maintain competitiveness of German industry.

EU/eurozone: Strong public criticism for eurozone governments that falter on reform agenda, but boosting financial support to governments which have implemented reforms. The SPD has struggled to make any headway in criticising Merkel's eurozone policy, which has received broad-based support from the German electorate. Both parties remain nominally committed to Germany's role at the heart of the eurozone and EU, but both are unwilling to provide carte blanche to governments unwilling to reform. The SPD will succeed in pushing Merkel towards greater dialogue with other eurozone member states, but with limited impact on closer banking and fiscal union.

Immigration: Implementation of policies aimed at making it easier for higher-skilled migrants to enter Germany, although vocal criticism to such policies from within the government. The SPD has been quick to criticise the anti-immigration rhetoric from the Christian Social Union (CSU), the Bavarian sister party of the CDU. With Merkel herself pushing for more high-skilled migrants, a black-red coalition would likely be more open to immigration than the current administration. However, CSU leader Horst Seehofer has said he would not support a CDU-CSU coalition unless Merkel agreed to a car tax on non-Germans, which many critics argued was just another symptom of the party's anti-foreigner stance. We do not expect Seehofer to follow through on this threat, but the CSU is likely to maintain a strong anti-immigration bias to pacify its conservative support base in Bavaria.

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Sector: Country Risk
Geography: Germany
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