Brandenburg Gate in Berlin, Germany

Germany Politics September 2021

Germany: First election without Merkel likely to be followed by lengthy government formation process

German voters will head to the ballots on 26 September to elect the members of the Bundestag. Opinion polls are currently too close to call, with the center-right Christian Democratic Union (CDU/CSU) and the center-left Social Democrats (SPD) neck-and-neck. Only one thing is set in stone: Angela Merkel, a beacon of stability and staple of German and European politics over the last nearly 16 years, will step down. The outcome could have a significant bearing on the direction of the European Union’s fiscal and monetary policy, although the exact impact is still hard to decipher. Polls indicate that the current CDU/CSU-SPD coalition will fall short of a majority, and the key question therefore is which party they, or one of them, will choose to form a three-headed government. The Green party are likely contenders, running in third place in the polls, as are the pro-market Free Democrats, who are following further behind. Although a drastic shift in policy is not expected, negotiations could take many months given the number of coalition options.

On fiscal policy, a coalition between the CDU/CSU, Social Democrats and Free Democrats would imply a swifter return to a balanced budget amid a greater focus on fiscal consolidation. Both the CDU/CSU and the FDP emphasized the need for a “black zero” in normal times, and they are keen to deactivate the escape clause in the debt brake as soon as possible. The SPD, however, wants some flexibility in the use of the debt brake rules. A coalition involving the Greens and the SPD would see less emphasis on fiscal prudence as both parties have stated that federal budgets should not be subject to a black zero policy. Instead, the left-leaning parties place more focus on investment, with the Greens wanting to soften the debt brake constitutionally to fund investments through limited deficits.

Climate change will also be a hot topic in any coalition negotiations involving the Greens, who are clearly the most ambitious of the four main parties regarding fighting climate change. They aim to cut CO2 emissions by 70% by 2030, paid for by the federal government. They have also proposed raising the CO2 emission tax and exiting coal-based electricity production by 2030. The latter will be a big pill to swallow, particularly for the CDU/CSU and FDP. On the other hand, the CDU/CSU and the SPD are aiming for carbon neutrality by 2045.The CDU/CSU wants the green transition to be based on market instruments, and it could find an ally in the FDP.

On Europe, while the CDU/CSU is in favor of deeper integration, it does not want debt sharing or a transfer union. The party wants to modernize the current rules without softening them. On this topic it could again find a partner in the FDP, which is in favor of an EU constitution and European army but wants to return fully to the Maastricht criteria. Meanwhile, the SPD is an advocate for greater fiscal transfers, akin to the Greens; however, the Greens also want to increase the size of the European Union’s budget, or grant the EU a permanent and autonomous fiscal capacity. The FDP, SPD and the Greens find common ground in their desire to turn the European stability mechanism (ESM) into a European monetary fund. However, their ideas differ greatly. The leftist parties want the fund to be a milder version of the ESM, whereas the Free Democrats want it to be tougher, aiming to supervise the policies of other member states more effectively.

All in all, while the parties propose different ideas on many policy areas, and some quite far-reaching, the likelihood of grand changes to policy is limited by the nature of the German system. Analysts at Berenberg added:

“The international debate about the potential outcome of the German elections often focuses on the scope for a major shift towards fiscal expansion in Germany and more risk-sharing in Europe. […] [However,] due to the limits enshrined in the German constitution, the watchful eye of the constitutional court and the role of the upper house of parliament, the scope for meaningful shifts in the overall stance of fiscal policy and of German guarantees for its EU/Eurozone neighbors is very limited regardless of the shape of the next government.”

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