German election: What is at stake?
- The September 26 German election will not only end the Merkel-era but also Germany’s tradition of two-party coalitions. Socialists (SPD) currently lead against the conservatives (CDU/CSU) in a neck-on-neck race.
- There is a wide range of possible coalitions with a centre-left (SPD, greens, liberals) or centre-right (CDU/CSU, greens, liberals) most likely to us. Polls suggest that Scholz (SPD) is more likely to become the next Chancellor than Laschet (CDU/CSU). Following cumbersome coalition negotiations a new government may still take office before year-end.
- Our base case is a centre government with either the socialists or conservatives leading a coalition with the greens and liberals. All parties want to increase public investment. The greens are most ambitious suggesting a € 500 bn investment plan and we think that they can push through parts of this idea in coalition negotiations.
- The left parties are open to a reform of the national and European fiscal rules. The greens and SPD are open to reform European fiscal rules in stark contrast to conservatives and liberals, which makes bolder changes quite unlikely also under a new German government.
- Unless the elections result in an outright left coalition, financial market effects are likely to be muted.