Monday, 23 September 2013

German elections: The public award a strong mandate to a divided coalition?

No doubt we are all aware of the unfolding results of the German election.  Angela Merkel’s Christian Democratic Union (CDU)/Christian Social Union (CSU) party has won what may be a pyrrhic victory. The party’s support was nearly two percentage points better than polls had been suggesting.

The margin comes at the expense of the Greens and her traditional coalition allies, the Free Democratic Party (FDP).  That leaves the FDP below the threshold that would enable them to take up their seats. The Alternative for Germany (AfD), a Euro-sceptic party, also made gains but fell short of the 5% threshold. The far left and Social Democratic Party (SPD) performed as expected.  There will now follow some weeks of negotiations which are imagined to yield a grand coalition government of the CDU/CSU and SPD.  Whilst frustrating for the participants, pre-election polls revealed that this was the most palatable coalition for most Germans.

Together such a “Grand coalition” will have a strong mandate but despite lacking its own consensus. As an alternative the CDU/CSU may consider entering government with the Greens but it seems unlikely – the Greens would be in danger of ceding share to parties outside the government in the way that very junior coalition partners tend to.

Some media suggest this is a good result. It certainly could have been worse but we still see this as a challenging environment. Divisions within the government will be significant, for example, the SPD will want to pursue higher taxes to fund education, stricter financial regulation and a national minimum wage.

Whoever does join the coalition will suffer guilt by association with some pretty unpalatable policies.  The issue of a third Greek bailout (or debt restructuring) will need to be resolved, as will the challenging paradox of German energy policy.  Germans want to increase renewables and clean energy use, but they are also frustrated by rising electricity prices and the resulting loss of industrial competitiveness (relative to the US with its cheap shale gas). 

There lies the winner’s curse for the prospective German government…

Guy Foster
Head of Portfolio Strategy

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