German Election Preview

Germany holds Federal elections on September 22 and, unlike recent European elections (read: Greece and Italy), most expect the results to maintain the eurozone policy status quo. However, foreign policy is only one piece of the puzzle—the main parties and potential coalition partners have differing domestic agendas. Investors’ expectations on this front could impact markets, too.

Five parties seem to have a shot at winning representation in the ruling coalition—the Christian Democratic Union/Christian Social Union (CDU/CSU), Social Democratic Party (SPD), Free Democratic Party (FDP), Green Party and Die Linke. Center-right CDU/CSU, the current majority coalition partner, is the front runner, polling at 40%. CSU is CDU’s Bavarian sister party, but tends to be more socially conservative and more euro-skeptical—most pin Chancellor Angela Merkel’s limited flexibility in eurozone political matters on this. The pro-business FDP, CDU/CSU’s current junior coalition partner, currently polls at 5%—the cutoff for earning seats in parliament. The center-left SPD and Green parties, coalition partners in the early 2000s, are running second at a combined 38%. Die Linke is Germany’s radical left party, composed of some remaining members of the Socialist Unity Party—the former ruling party in East Germany. Die Linke polls at 8% and has an outside chance at becoming a junior coalition partner.

The ruling coalition likely takes one of four forms. The most probable, in my view, is a so-called grand coalition of CDU/CSU and SPD. These parties last co-governed from 2005-2009, during Merkel’s first term. This coalition would almost certainly remain committed to the eurozone, and the SPD’s presence might result in more flexible bailout terms, should the need arise. Probable domestic policies include shifting energy costs and subsidies for alternative energy from consumers to businesses, no tax increases and rent control and wage floors in areas with no collective agreement.

The second-most probableoutcome is an extension of the current ruling coalition. Its foreign policies are similar to those for the grand coalition, though they favor stricter bailout guidelines and are against Eurobonds. Domestically, they’re also against tax increases, but they also favor targeted tax cuts for specific groups—like families with children. They also favor rent control and wage floors in certain areas.

A third, less likely, possibility is a coalition between CDU/CSU and the Greens, which currently poll at 13%. These parties have never governed together on the federal level. Their foreign policy wouldn’t much differ from that of the CDU/CSU/FDP and it seems domestic policy would focus on a push for more renewable energy.

The final possibility is a center-left grouping of SPD, Green and Die Linke. They too have never governed together on the federal level. This is the only scenario where SPD’s Peer Steinbrück would become Chancellor. This coalition’s fundamental foreign policy differences include openness to Eurobonds and opposition to military interventions. Domestic policy differences include increased regulation of labor markets and the energy and financial sectors, as well as limited weapons exports.

Of the four potential outcomes listed above, in my opinion, only the SPD/Green/Die Linke coalition government—the least probable outcome by a fair margin—would be viewed as a negative result for markets. While their foreign policy shouldn’t cause much of a stir—and may be an incremental positive for peripheral Europe—their domestic policies would increase costs and regulation, likely negatively impacting German business activity. The best outcome for markets would probably be the status quo, as the current coalition is a known quantity. However, this coalition is only possible if the FDP garners enough votes to pass the required 5% threshold to win seats in the Bundestag—a level they’re currently flirting with. The two remaining options seem to be incremental positives for the periphery (easier bailout terms), but slightly negative for Germany due to higher energy costs, which would weigh on firms’ bottom lines.