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Chancellor Merkel faces a difficult
few weeks as she attempts to pull together a new coalition. We put
a roughly 70% probability on this being a Grand Coalition of the
CDU and SPD, and 25% on CDU-Greens (it is very unlikely – sub 5% –
either that the left attempts a coalition without the CDU, or that
Merkel leads a minority Government). The process will take some
time. Near term however, last night’s election poses a number of
questions which we try to answer here.
1: Is
Germany shifting to the left?
German voters have, if
anything, shifted to the right. Excluding very minor parties, the
left lost 2.7% of the vote, while the right gained 2.6%. The centre
of gravity within popular opinion shows no significant signs of
shifting left (although CDU policies have trended in a leftwards
direction). However, because of Bundestag rules (with the FDP and
AfD both missing out), the right in aggregate is significantly
underrepresented – and now has a minority of Bundestag seats.
Meanwhile, the left retains a majority in the Bundesrat. Germany
may not have shifted leftwards, but its parliament
has.
2:
Will the new political establishment be more or less sceptical on
European issues?
Neither of the more
Euroskeptic parties made it into the Bundestag. The CDU will now
need to swap coalition partners, from the FDP – which was quite
vocal on European support mechanisms at certain points – to a left
of centre party which is more intuitively pro-European. On the
surface, the balance within Government may shift towards an
attitude which feels more amenable from the perspective of the
European periphery. However, the slightly more sceptical CSU
performed well within the Union (CDU-CSU), and is likely to have a
significant influence within Government. Outside Government, the
strong performance of the AfD, which only narrowly missed out on
Bundestag representation, may pose longer-term questions for the
centre-right - especially as we get closer to next year’s European
elections in May. Net-net therefore, we expect the balance of
pressures around the Government’s approach to Europe to be roughly
similar.
3:
Will Merkel’s new partners play a significant role on either
European or financial issues?
Regardless of whether
the Chancellor forms a coalition with the SPD or the Greens, she
will be negotiating from a position of strength – against parties
that have underperformed. Either party will need to carefully
shepherd its political capital to get the best possible deal for
its voter base. Given their weak position, we expect both SPD and
Greens to focus more on domestic issues, and not to treat European
differences as a deal-breaker (despite some of the noises which
have emerged today). However, one area where we think they could
have real influence is on financial sector issues; either party
could push more strongly for the introduction of the Financial
Transactions Tax (FTT), which would likely have been doomed under a
CDU/CSU-FDP coalition.
4:
Will there be a change of finance minister?
It is too early to tell
precisely what the trade-offs will be in the formation of a new
coalition. However, the Chancellor will be in a much stronger
position to demand that she keep the finance ministry than we would
have expected a week ago. Continuity looks significantly more
likely than it once did.
5: How
realistic is the prospect of a deal with the Greens instead of the
SPD?
As we noted in July,
Merkel has carefully positioned herself so that this option is
available. A deal with the SPD would be easier for much of the CDU
to swallow, but she will be able to lead her party where she wants
if she views a different deal as more advantageous. The SPD could
also decide that it is not prepared to risk a repeat of the
2005-2009 experience. However, we think this is unlikely (around a
25% probability).
6:
Will there be a big push forward now that the election is out of
the way?
We never bought into
the idea that the German Government would change its fundamental
approach to policy management after this election. Merkel’s
cautious approach to her management of Germany and the broader
region has been vindicated by the electorate. While she is likely,
in her third-term, to give more thought to legacy issues we don’t
expect any significant change in approach in the near-term. In her
press conference today, the Chancellor reiterated that she plans no
significant change of pace on European issues.
7: Are
the FDP and AfD finished now that they didn’t make the
Bundestag?
The future for the FDP
looks difficult, and it is notable that Bernd Lucke – the AfD
leader – was repeatedly asked last night whether his party was ‘the
new FDP’. We think the AfD have some chance of becoming the second
party of the right if they are able to hold together over the
coming months. Their support base was disproportionately young, and
drew from all parts of the political spectrum. However, keeping a
new party together is difficult, and the recent experience of the
Pirates shows that a swift lurch down towards electoral irrelevance
is possible. However, next year’s European elections will provide a
new cause for the party to rally around – and it could improve its
position from there.
8:
Should we expect paralysis while a new Government is
formed?
Clearly, policymakers –
from the Chancellor on down – will be distracted by the process of
forming a new Government. We do not expect Germany to play a
particularly active role in the European Leaders Summit on October
24th/25th. However, the Chancellor will be able to respond to
incoming pressures and any near-term crisis (so long as it doesn’t
require a Bundestag vote). In practice, the ‘distraction effect’
that observers pointed to ahead of the election should simply be
assumed to extend a couple of months beyond it.
9:
What are the key dates / points to look out for in the
near-term?
We should get more
detail on the likely route ahead after the SPD leadership meets on
Friday. While party leaders have indicated that ‘the ball is in Ms
Merkel’s court’, the reality is that the SPD’s willingness to
engage or not with the CDU will be crucial. By early next week we
should have more of a sense of the approach they are likely to
take. For now, Gabriel and Steinbruck are playing down the chances
of a deal in the near-term.
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