German Election, Expected Policy Changes

German Elections          Expected Policy Changes

The German Election will take place on September 24, or in less than 2 months.  Many or most observers focus on the high likelihood of Merkel being ‘reelected’ Chancellor and assume that policies will continue unchanged.  In Germany, however, much relies on the make-up for the ruling coalition and as it is expected to change, so will the direction of government policy.  By looking at the make-up of the forecasted next coalition, we can see that Germany will move to the right, reduce regulation, improve the business environment, increase military integration with Europe, and improve economic ties with China.  In general, such moves should be supportive to Germany’s stock market and the Euro.

The Current Ruling Coalition

The current ruling coalition is made up of the CDU/CSU and the SPD.  The CDU/CSU is the largest right-leaning political party and is headed by Angela Merkel, the current Chancellor.  It is generally considered a center-right party.  Its partner is the SPD, the largest left-leaning political party which is headed by Martin Schulz, the former two-term President of the European Parliament.

Germany has mostly fared well during Merkel’s third term as Chancellor, from 2013 to present, thanks mostly to a strong economy.  However, the ruling coalition’s policy stances have been mixed as the SPD has acted to temper the right-leaning CDU/CSU.  In terms of political cohesion, the ruling coalition received over two-thirds of the popular vote in 2013 so the political opposition has not been excessive.  But, as the ruling coalition was made up of parties on different sides of the political spectrum there was less traction on changing longer term policy.

The Next Ruling Coalition

Expectations are that the current ruling coalition government will be replaced during the election.  The current CDU/CSU and SPD coalition is expected to change to a CDU/CSU and FDP coalition after the election.  This will pull Germany further to the right of the political spectrum.  In general, such a coalition should result in a stronger Euro and stock market performances.

The SPD, the Socialist Party, follows a center-left platform which seems to have drifted slightly more to the left recently.  The FDP, the Free Democratic Party, follows classical liberalism (fiscally conservative and socially liberal) and is generally seen as the pro-business party.  Replacing the SPD with the FDP in the ruling coalition will bring significant change to Germany, especially as Europe appears to be facing a number of important decisions.  The ruling coalition would be formed and then the next chancellor’s cabinet would be chosen after the election and likely before year-end.

Why CDU/CSU and FDP?

Though there is still a possibility for forecasts to shift, it seems rather certain that these two parties will enter into a coalition.

The FDP was knocked out of power in the 2013 election as they did not reach the 5% minimum votes necessary to take seats in the Bundestag.  However, prior to this the party had been known as the ‘king-maker’ due to its popularity in ruling coalitions – as the FDP follows classical liberalism it has elements of both right and left politics and proved to be a good coalition partner.  As the FDP is polling closer to 10% than 5% at present, the speculation is that they could return as the ‘king-maker’.

Additionally, the CDU/CSU is polling around 40%.  If both the CDU/CSU and the FDP end up obtaining votes near or exceeding the high range of polls, their joint vote percentage would exceed the 50% for a ruling coalition.

Speculation became more intense as the CDU/CSU and FDP performed very well in North Rhine/Westphalia election in May and entered into a ruling coalition for the state after the election.  The ruling coalition had been SPD and Green, both of which performed very poorly in the most recent election.  As opposed to the last election, the CDU/CSU gained 7 percentage points of the vote and the FDP gained 4 percentage points whereas left-leaning parties in general underperformed.  As an early indication for Germany’s general election in September, it not only showed the mood of the electorate but the willingness of the CDU/CSU and FDP to partner.

Lastly, we should point out that the Social Media Influence (SMI) is forecasting that the CDU/CSU and FDP will in fact gain enough votes to form a ruling coalition.  It is also forecasting rather significant underperformance for left-leaning parties.

How will Policy Change in the New Coalition?

Comparing the key parties on policy stances, we can start to see the direction the presumed next coalition will take Germany.

Table 1:  Comparison of Policy Stances for German Political Parties SPD, CDU, and FDP

The parties in the current ruling coalition produced rival stances on the many of the same issues.  This is really not that surprising as the SPD’s left-lean would inherently produce the opposite opinion than the CDU’s right-lean.  For many issues, these varying opinions essentially cancelled each other out.  In the next expected coalition, the CDU and FDP are much more closely aligned on policy matters and we should see quicker movement and a more unified voice.

From the table, we can see areas where expected movement will take place.

In terms of foreign policy, Germany will likely move harder against Russia and likely attempt to come closer to China.  From an economic standpoint, better relations with China could certainly help Germany and Europe, especially considering the increasingly negative headlines between the US and China.  In other words, China is more likely to jump at the chance to get closer to Europe in a period when relations with the US have become less secure.

Military spending will likely increase during the next coalition.  The SPD has voiced concerns over raising military spending and even proposed to focus more on disarmament.  In contrast, the expected parties of the next ruling coalition have come out in favor of creating a European Defense Union.  This entity to start would focus more on coordinating military efforts but will likely become a unified military force for the EU.  Increased spending on military will at first please the US as it has been complaining about this for some time, but a European military would also reinforce a split between the US and Europe.

In economic policy terms, the expected next ruling coalition will focus on reducing regulations and further fiscal austerity.  In general, such discourse should be supportive to the stock market and currency, especially as many in Europe have been calling for increased fiscal spending and common debt issuance.