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23 September 2013

Deutsche Bank: Pyrrhic victory for Angela Merkel

The federal elections yielded a surprising result that will make a grand coalition the most likely outcome.


Authors Barbara Böttcher, Klaus Deutsch

Chancellor Merkel’s conservative party secured a clear victory, finishing just 4 seats short of an absolute majority. As her junior partner, the FDP (Liberal Democrats), failed to clear the 5 per cent hurdle for entering parliament, the CDU/ CSU has to look for a new coalition partner. The SPD gained slightly while the Greens dropped to 8.4 per cent. The Left Party, with 8.6 per cent, will become the third strongest party faction in the Bundestag.

The CDU might now approach both the Green Party and the SPD but a grand coalition has a higher likelihood than an eco-conservative government. The euro-sceptic AfD (newly formed "Alternative for Germany") failed to enter the Bundestag but its good showing can be seen as a warning to the established parties to improve communication on euro crisis management.

Building a coalition will be tough as the CDU/CSU will be loath to give concessions – but potential coalition partners who have a theoretical outside option will demand high concessions. However, neither a minority government nor new elections are realistic alternatives.

A grand coalition might adopt a slightly more pro-active approach towards euro politics but the principle of fiscal support in return for reform commitments will remain and debt mutualisation is not in the cards in the nearer term. In domestic policy there are some sticking points between the CDU and the SPD, above all tax and labour policies, but they are unlikely to be a real obstacle to forming a joint government.

Election manifestos provide only little guidance for the final policy agenda that coalition partners agree on and lay down in a coalition agreement. Domestic policy issues will play a more predominant role in the negotiations as the parties differ more on these topics:

  • As regards tax policy, the SPD wants to raise marginal income tax, capital gains tax and introduce a wealth tax whereas the CDU/ CSU had promised some tax relief, although subject to the budget situation. The CDU might have to compromise on parts of its plans.
  • The SPD envisages the implementation of a statutory minimum wage of EUR 8.50 while the CDU/ CSU want to leave this responsibility to the partners in collective wage negotiations, to be addressed in sector-specific wage settlements.
  • In terms of fiscal policy there should be sufficient leeway for additional public investment in infrastructure and education without endangering the German debt brake which kicks in in 2016.
  • Managing the Energiewende: both parties adhere to the general goal of exiting nuclear power but the details on means and instruments are open. The crucial question will be how to balance the cost of the energy turnaround between industry and private households.

The implications for German euro politics are very limited, as the authors have frequently stated. There will be no substantial change to the conditioned support course vis-à-vis the euro area periphery. A grand coalition might adopt a slightly more pro-active stance on growth initiatives and institution building though any evidence of that will only come after the EP elections. A push for a debt redemption fund is not in the cards, given not least the guidelines laid down by the German Constitutional Court.

Full article

© Deutsche Bank

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