Brandenburg Gate in Berlin, Germany

Germany Special February 2018

Germany: Nearly five months after the federal elections, Germany is on the verge of installing a new government

An agreement to renew Germany’s Grand Coalition hangs in the balance, with the result of a vote among Social Democrats (SPD) to be made public on 4 March. The agreement was reached on 7 February with Chancellor Angela Merkel’s Christian Democrats (CDU) and includes higher public expenditure, but is devoid of major reforms that will increase the economy’s growth potential. While the vote is expected to be close, some analysts anticipate a small victory for the “yes” camp. However, if the members reject the proposed coalition renewal, the likeliest outcome will be new federal elections; Merkel has indicated she prefers new elections over a minority government. However, the acceptance or refusal of the deal is unlikely to affect the economy, as solid growth is penciled in for this year on the back of the same drivers as in 2017.

The deal includes increased public expenditure on SPD goals such as education, and physical and digital infrastructure. In addition, extra funds will be made available for social and affordable housing, in part to reign in rising rent prices in cities, and the pension system will be reformed. While the deal lacked reform proposals in terms of Europe, the coalition partners expressed their willingness to listen to French President Emmanuel Macron’s suggested amendments. The finance, labor and foreign affairs ministries will be handed over to the SPD, but this is unlikely to alter Germany’s fiscal stance. Merkel has commented that the government can only spend the money it has: The federal government will continue to balance its books. In short, while the deal would signal an end to the political uncertainty, it will likely not significantly alter the outlook on the German economy.

Federal elections were held on 24 September 2017, fracturing the political scene and complicating the process of government formation, which was prolonged on 19 November when the Free Democratic Party (FDP) pulled out of the “Jamaica” coalition negations with the CDU and the Greens. As a result, the SDP became the only viable option to avoid new elections. With or without a deal announced on 4 March, the economy should be poised for another year of solid growth this year on the back of the same fundamentals that were in place in 2016 and 2017. Government finances are also expected to remain in black despite increased expenditure; Germany will not become a net borrower.

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