Advantages and risks (according to the markets) of a three-party government in Germany after the elections
The analysis by Andreas Billmeier, European economist at Western Asset, part of Franklin Templeton
We present our updated view on the German elections scheduled for September 26 and the potential market implications. polls have shown marked swings and competition is currently open, but a ruling coalition is likely to require three parties.
POLITICAL THEMES AND REVISITED PRIORITIES
As expected, the pandemic is likely to play only a minor role in the elections given the advanced stage of vaccination in Europe and the limited impact of the delta variant of Covid on the economy. On the other hand, the importance of climate change as a key topic was highlighted by the devastating floods in West Germany earlier this summer. As a result, several center-right politicians advocated greater flexibility with respect to the public debt brake. It is also possible that an emerging refugee crisis linked to Afghanistan will dominate news outlets during the election period, echoing the German experience with the flow of Syrian refugees in 2015. Although this topic is likely to favor spectrum parties again. (far) right politician has not yet filtered out in the polls.
DEVELOPMENTS IN THE SURVEYS
The dynamics of the polls have changed dramatically since June. Compared to voting intentions when the first candidates were presented a few months ago (“Peak Green” euphoria), the economic reopening has increased support for the main ruling party, the center-right CDU / CSU. However, after the floods in Germany in mid-July, sentiment turned against the CDU after a couple of hard-earned PR mistakes. Somewhat surprisingly, given the perceived link between natural catastrophe and climate change, the beneficiary was the SPD (the current partner of the center-left junior coalition), which came in second ahead of the Greens for the first. time since late 2018, according to an opinion poll. SPD politics is perceived as uninspiring but solid with few mistakes and Olaf Scholz, the party's lead candidate and current finance minister, tops the popularity chart. That said, all three major parties, CDU / CSU, SPD and Greens, are on the projection close range at around 19% -23%, with the CDU currently averaging slightly ahead.
MECHANICS OF THE COALITION REVISITED
Critically, current polls suggest that two parties are not likely to get enough seats to form a ruling coalition, in contrast to the situation a couple of months ago when Conservatives and Greens had a majority. Coalition governments are the rule rather than the exception in Germany, but the potential need for a third in the mix at the federal level is new: three-party coalition governments have only been built at the regional level.
In the current juncture, the Liberals (FDP) are a possible third member of a coalition, but at the moment it is not clear which coalition that could be. The remaining two parties that could join the Bundestag – Linke on the (far) left and AfD on the (far) right – are given too low a percentage projection or are not politically attractive for coalitioning with the larger parties, or with both.
It is unclear whether the FDP (party color: yellow) would be able to join a so-called "Jamaican coalition" with the CDU (black) and the Greens, as they suddenly withdrew from a similar negotiation after the 2017 elections, leaving the country in limbo and damaging the party's credibility. Furthermore, the FDP has pledged to maintain the debt brake in its current form, a potential obstacle during negotiations with the CDU / CSU and in particular the Greens who are intent on accelerating spending on climate-related issues and reviewing the tax code in ways that will be difficult for the FDP to digest.
Alternatively, the FDP could also be part of a "traffic light coalition" with the Greens and the SPD (red) if the latter's rise continues and Olaf Scholz becomes Chancellor, relegating Merkel's party to the opposition after 16 years in power. However, it will be even more difficult to bridge divergent opinions in this formation and the required changes, including on tax rules, may not be attractive with the FDP's electoral base.
Finally, another possible formation is a continuation of the current grand coalition between CDU / CSU and SPD and the addition of the FDP or, more likely, the Greens (“coalition of Kenya”). We believe these constellations are possible, but only as backup solutions as SPD and CDU will not skip another four years as a coalition partner. That said, there is probably more programmatic overlap between the current coalition and the Greens than with the FDP, especially when it comes to issues of climate change and tax rules. Finally, the SPD could appeal to the CDU to return the favor of four years ago and support a center-left coalition to avoid new elections.
WHAT ARE WE AT?
Currently, the competition is open and many more constellations are possible than just a few months ago. That said, we believe it is still highly likely that the Greens are part of any coalition, but the need to involve a third party leads to more complex negotiations and compromises. It will also likely make any governing coalition less stable.
MARKET IMPLICATIONS
In many respects, a federal-level tripartite coalition in Germany is an experiment and there are greater risks to political stability, which is a new experience for postwar Germany. If the FDP is part of the ruling coalition, the debt brake has a better chance of surviving on its own, containing spending pressures. That said, more (divergent) political priorities also promote more diversified spending and we believe that ultimately a reformulation of the internal fiscal rule is the path of least resistance and has become more likely in our assessment. Furthermore, there are possible spillover effects on the revision of fiscal rules at the European level, which is expected to end after the French elections in 2022. In terms of markets, we believe that German government bond yields can grow in almost any scenario. . Our conviction would further increase if the FDP were not part of the coalition.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/elezioni-germania-governo-vantaggi-rischi-mercati/ on Sat, 25 Sep 2021 06:30:53 +0000.