A guide to the German election Many observers of the euro crisis consider the German general election taking place on 22 September the most important political event in Europe this year and a possible game changer. By its sheer size and financial power, Germany is the key country in managing the crisis. Who is going to win? Angela Merkel is in pole position. She is by far the most popular politician in Germany and has established a relationship with citizens as a doctor does with his patients: they don?t exactly understand the diagnosis and the treatment not at all. But they do trust that the woman doctor acts to the best of her knowledge. If things are like that, one needs very strong reasons to change the doctor. The reason could be that her coalition FDP doesn?t make it to the Bundestag. In this case, a Grand Coalition of Conservatives (CDU/CSU) and Social Democrats (SPD) is a fall-back option, and Merkel would still be chancellor. What is the risk outcome for financial markets? The main risk outcome of the election is a centre-left coalition (SPD and Grüne) relying on support from the far-left. Such a government would be potentially unstable and inexperienced when it comes to euro-crisis management. Another more temporary risk outcome would be an inconclusive result leading to several months of negotiations with an uncertain outcome. Will there be much change in economic/fiscal policy? Probably not that much, but that of course depends on the election outcome. We consider a new term for the current CDU/CSU/FDP government as slightly more likely than a Grand Coalition. We don?t expect any of these coalitions to give a fiscal stimulus to the domestic economy. More support for peripheral countries? Yes and no. The German approach to euro crisis management will probably remain cautious, gradual ? and pragmatic when circumstances demand it. We consider a government including the SPD supportive for peripheral bonds. There will be no fast track to fiscal and full banking union. The ?reluctant hegemon? ? as The Economist entitled a report on Germany in June ? will probably not act against its nature even when election day is over. Will Germany propose to drop the Financial Transaction Tax? Probably not, but more watering down could happen, especially if the current government gets confirmed. In this paper, we present what we think customers should know about the election. To make it more digestible, we have divided the analysis into ten questions and answers. A guide to the German election 1. Who will be voting for whom, and how? There are 61.8 million eligible voters, three million of whom are young first time voters. On 22 September, polling stations will be open from eight in the morning to six in the evening. On the same day, voters in the state of Hessen will vote for the regional parliament (Landtag). Regional elections in Bavaria will take place one week earlier. Several polling institutes will publish exit polls at six o?clock in the evening. Projections based on actual election results will be published soon afterwards and be updated during the evening. When opening on Monday 23 September financial markets will know the preliminary election outcome, but not which parties and persons will lead the country if results are inconclusive. During that day, the official final results will be published.34 parties have been admitted to the election (see the list here ). The most important ones are: Christlich Demokratische Union Deutschlands ( CDU ), conservative party led by Angela Merkel (59) since 2000. The CDU (together with the CSU) is very likely to be the strongest party again, as it has been in 14 out of 17 general elections since 1949. Christlich-Soziale Union in Bayern ( CSU ), the Bavarian sister party of CDU, led by Horst Seehofer who is also Bavaria?s prime minister. In the Bundestag, deputies of CDU and CSU are part of the same parliamentary group. The CSU holds three out of 16 ministries of the current government. Sozialdemokratische Partei Deutschlands ( SPD ), led by Sigmar Gabriel. The SPD?s candidate for chancellor, Peer Steinbrück (66), was finance minister when the SPD was the CDU/CSU?s junior partner in the Grand Coalition government from 2005 to 2009. He was also prime minister of North Rhine Westfalia. Freie Demokratische Partei ( FDP ), liberal party, junior partner of CDU/CSU in the current government. On the back of a strong result in the 2009 election, the FDP holds five out of 16 federal ministries. Party leader: Philipp Rösler who is also minister of economics and technology in Merkel?s cabinet. Bündnis 90/Die Grünen ( Grüne ), founded in the 1980s as an ecological movement, the Greens were the SPD?s junior partner under Chancellor Gerhard Schröder from 1998 to 2005. The party is led by Claudia Roth and Cem Özdemir and aims at replacing the current government together with the SPD. Die Linke : Far-left party with strong roots and also strong election results in eastern Germany. These six parties are currently represented in the Bundestag. Of all the other parties, two merit closer attention, although both only get around 3% in polls. Alternative für Deutschland ( AfD ). AfD was founded early this year with the main aim of an ?orderly resolution of the euro area?. Piratenpartei , founded in 2006, dedicated to internet freedom and civil rights. From 2009 on, the ?pirates? succeeded in entering many municipal and four regional parliaments. Deputies are elected for a legislative period of four years. The electoral system combines elements of majority vote and proportional representation. Voters have two votes. The first one goes to the preferred so-called ?direct candidate?. In each of the 299 constituencies, the candidate collecting a relative majority of votes goes to the Bundestag so that each constituency is represented in parliament. However, the seats in the Bundestag are distributed according to the second vote which goes to a party. Now it gets complicated: If, in any given federal state (Bundesland), a party gets more direct mandates than it gets seats according to proportional representation by the second, the surplus seats remain as so-called ?overhang? mandates (Überhangmandate). To ensure proportionality, the number of seats for other parties will be increased as much as necessary to ensure that any overhang seats are compensated for (Ausgleichsmandate). ?Overhang? and ?compensatory? mandates are the reason why the Bundestag will probably count more than the minimum number of 598 seats (currently: 622 seats). There is a 5% minimum threshold on the second vote for a party to enter parliament. The threshold does not apply if a party wins at least three direct mandates. In 17 general elections since 1949, this has happened only three times. One of the first tasks of the new Bundestag is to elect the chancellor. An absolute majority of votes is required in the first ballot. As between 4% and 8% of votes usually go to parties that don?t make it to parliament, a coalition typically needs around 46% to 48% of the votes to obtain a majority of seats. In the past, it took on average 37 days after the general election that the Bundestag deputies elected a new chancellor. The next German government can therefore be expected to be up and running around the end of October. Since 1949 all chancellors have been elected in the first ballot. Some political observers are speculating that this time could be different. In this case, the role of the Federal President (Bundespräsident) becomes important in a lengthy and complicated process that can result in new elections (Art. 63 of the German constitution). If nothing else works, we expect the SPD ? however reluctantly ? to enter a Grand Coalition again, securing a large majority for a CDU chancellor (Merkel). The last general election (2009) brought the current CDU/CSU and FDP government to power, ending four years of Grand Coalition. The 2009 results: CDU/CSU: 33.8%; SPD: 23%; Grüne: 10.7%; FDP: 14.6%; Die Linke: 11.9%; others: 6%. Voter turnout in 2009 was 70.8%, which was the lowest ever. 2. What are the main election issues? An election campaign in Germany usually has nothing in common with a fight about life or death (in political terms). The two dominant parties, CDU/CSU on the one hand and SPD on the other, are both moderate parties aiming at the centre of society, one centre-right and the other centre-left. There is a large area of overlap of ideas, not only in foreign policy but also in various fields of interior and economic policy. While there are of course different views and priorities, these differences are rarely 180 degrees, and on many issues they are mostly about tone and nuances. The official party lines are often closer to each other than the extremes within both parties. There is no single one top election issue this time . The governing parties are clearly trying to offer no reasons for attack. As unemployment and inflation are low and the German economy stable compared to many other countries, the opposition cannot credibly attack the government on the macroeconomic front. It concentrates instead on the wide area of social (in)justice . Fair pay, including minimum wages, and creating better jobs are prominent topics against the backdrop of several million working poor. Fair taxation comes on top, with the SPD, Grüne and Die Linke campaigning for higher income taxes and the reintroduction of a wealth tax. The social agenda also includes a debate about a brake on the increase of rents ? given strongly rising rents and house prices especially in some big cities ? and better access to higher education for disadvantaged groups. Record number of persons employed, low unemployment rate 3. What are the main parties proposing? Do they address the challenges for the German economy? In an interesting piece of research, linguists and political scientists have shown how all the main political parties except Die Linke have moved from ?right? or ?left? to the political centre between 2009 and 2013. For example, strong believers in free markets from the FDP are now campaigning for a minimum wage. Under Merkel, the CDU has certainly become more ?social-democrat?. And maybe what is called ?centrist views? on economic and social policy have also changed over time. Shift in political positions between 2009 and 2013 Horizontal axis: Economic policy (from ?left? to ?right?). Vertical axis: General policy (from ?progressive? to ?conservative?). Election programmes are usually very thick books that we would not recommend reading. (Those who want can take a look here (in German) . We picked some of the highlights with special focus on economic policy, taxes and approach towards the euro crisis, hoping that this gives an illustrative and fair picture of what the parties are campaigning for. Issues of social and labour market policy are high on the agenda. Selected election proposals of Germany?s main political parties Do the parties address the major challenges for the German economy? Only to some degree. From our perspective, it?s a pity (albeit no surprise) that most parties don?t place the macro challenges Germany faces higher on lis of priorities. Just to name three points: Potential growth in Germany is very low . German research institutes recently estimated it to be 1.3% p.a. for the period 2012 to 2017, with the projected contribution from labour input turning negative in 2016. Put differently: ageing will reduce potential growth considerably unless compensated by increased labour force participation, labour productivity and net-immigration. In general, not a lot of emphasis is put on these issues. The investment rate (share of capital spending in GDP) in Germany is low when compared to OECD standards, and it has declined in recent years, as was shown by DIW in a recent study . This is true both for private and for public investment. The biggest public investor in Germany is the municipalities. Many of them are, for various reasons, in bad financial shape and loaded with debt. From a growth perspective, it would make much sense for the next government to reform the system of municipality financing so as to give cities room for investment and to direct public spending more towards investment, which is an important source of growth and productivity. Stronger public and private investment would also contribute to lowering the current account surplus (6.3% of GDP in 2012) that was not always invested wisely in the past. Income and corporate taxes may not be particularly high by international standards. But without any doubt, tax laws are more complicated than what is justified by the simple fact that life is complicated. So many rules, so many exceptions from rules that seem to exist just because they have existed in the past. It may be literally true or not, but an old quip says that more than half of the worldwide literature on taxes has been written in German. With a simpler tax system the next government could make an outstanding contribution to the German economy Growth in German not that strong in a longer perspective Cologne Institute for Economic Research (Institut der deutschen Wirtschaft, close to the employers? association), tried to quantify what the main parties? plans in the area of taxation, social policy and labour market policy would mean for growth and employment. The president of the institute had a very harsh judgement: “From an economic perspective, the election programmes are more or less a disaster: some of them are giving away jobs, others put them at risk.? It looked a bit like a recommendation to vote for the FDP, as leaving most thing as they are is preferable to the other parties? projects, in the institute?s view. The methodology of the study, however, is not beyond criticism as no account has been taken of higher public investment funded by higher tax revenues. We would not consider any plausible election outcome as a trigger to change our macro-economic forecast for Germany for 2014. After all, what political parties ?promise? ahead of election usually differs a lot from what they actually implement afterwards. This applies especially to coalition governments forced to agree on compromises. 4. Why is Angela Merkel so popular? So who is going to win the election? ?Angela Merkel? could be the natural answer. Surveys suggest that she is by a wide margin the most popular politician in Germany, far ahead of the SPD?s Peer Steinbrück and also far ahead of her own CDU party. According to polls published by ARD-Deutschlandtrend , most Germans want and expect Merkel to stay in Willy-Brandt-Str. 1, the chancellery?s address in Berlin. Most Germans also want the CDU/CSU to lead the next government. There is no widespread mood for change in the population. Shelves can be filled with books and articles trying to decipher the Merkel method and explain her long way from being ?Kohl?s girl? in the early 1990s to becoming the ?most powerful woman in the world? (Forbes). The reasons why her star is shining so brightly can be found in a mix of factors ranging from lack of serious competitors over her perceived personal character traits to just good luck. Starting with the good luck factor, the current government clearly benefits a lot form the ?Agenda 2010? initiated by SPD chancellor Schröder in 2003. In 2000, Germany was Europe?s ?sick man?, while now it is the only large economy in reasonably good shape. By losing the 2005 election, the SPD took the political cost of implementing painful steps like cutting into social benefits while the current government is reaping the fruits. In fact, in the last four years, not a lot has happened to increase the low rate of potential growth of the German economy. In the field of economic policy, large parts of ?promised? homework have not been done: No income tax reform, no reform of the funding system for municipalities, no VAT reform, for example. Economists and business lobbyists are right to complain about a standstill on reforms, about a government resting on its laurels ? or even on the former government?s. But still: while large parts of Europe are in crisis, Germany is not. And while Merkel may not have a masterplan for the euro, most Germans still feel that their destiny is in relatively safe hands with a chancellor who is seen as defending German interests and virtues by asking other countries for discipline and thriftiness. When negotiating in Brussels or traveling to Athens, she is often seen as acting almost like a president above party lines. That adds to the bonus in opinion polls that incumbents usually enjoy. Elections are certainly about what political parties propose but they are also about personalities. Angela Merkel is being perceived as calm, trustworthy, hard-working, humble and down to earth, knowing the price of butter from own experience and therefore not that far away from ?Otto Normalbürger?s? life. She was reported to wear a watch that tells her just what time it is ? as most people do. No bling-bling, no excesses or scandals. All this is seen as positive ? although sometimes as a bit too puritanic by some ? and it contrasts with many other politicians. Her political style is most of all pragmatic, non-ideological. Süddeutsche Zeitung once described her ?a pragmatic power machine with a human face?. As a trained physicist she is more interested in getting things done than in building castles in the air. Pragmatists typically get criticised for acting opportunistically, lacking convictions and also vision ? and that?s true. Merkel would probably subscribe to the German version of ?A bird in the hand is worth two in the bush?. Her way of managing expectations is to avoid making too many promises: You cannot be blamed for breaking a promise you never made. And in an election campaign, it is hard to challenge her convictions if these convictions are barely visible. Like a shop owner, she is not afraid to take products not selling off the shelf and get inspired by the voice of the people or by competitors? proposals. This approach has led to take a long list of squealing U-turns, for example by abolishing compulsory military service, by first arguing against and then in favour of the Financial Transaction Tax, and most of all, by announcing the plan to abandon nuclear energy by 2022, just a few days after the tsunami hit Japan in March 2011. All these U-turns did not hurt her credibility to any measurable degree. They do, however, make it difficult to say what exactly the Conservative Party stands for. But as long as the method works in terms of securing votes, a party rebellion is unlikely, all the more so as Merkel has side-lined internal competitors in recent years, providing proof of her assertiveness. The way she ? a Lutheran, eastern, childless woman ? has succeeded in reshaping a once male, western, typically catholic, family-oriented party has earned her respect also from people not close to the CDU, and maybe especially among women (51.5% of eligible voters). Someone from the CDU once put it like this: Merkel has established a relationship with citizens as a doctor does with his patients: they don?t exactly understand the diagnosis and the treatment not at all. But they do trust that the woman doctor acts to the best of her knowledge. If things are like that, one needs very strong reasons to change the doctor. 5. What are the possible government coalitions and what would be the impact on financial markets? If financial market participants could choose Germany?s next government they would probably go for a one that provides a stable government with predictable, market-oriented policies focusing on measures that foster (domestic) growth while at the same time playing a constructive role in helping to overcome the euro crisis. DAX at record high, 10Y Bund yields near record low Not a single national election in Germany since 1949 has resulted in a one-party government. The reason for this is proportional representation plus the German tradition of having one strong conservative group (CDU/CSU) on the one hand and a strong Social-Democrat Party (SPD) on the other. Currently however, partly because of the huge popularity gap between Angela Merkel and Peer Steinbrück, the SPD is collecting only around 25% of voting intentions, as opposed to around 40% for the CDU. ( This link leads to current polls results. For an average of polls published during the last 20 days, please click here .) On election day, 44% for CDU/CSU could be enough to form a pure CDU/CSU government if 12% of votes go to parties not entering parliament. That could happen if both the FDP and the AfD turn out below 5%. While this is ? as far as the FDP is concerned ? not a likely scenario in our view, it is an interesting one reflecting Merkel?s strong position. In terms of coalitions, here is what could happen. We have attached probabilities and expected financial market impact based on our assessment of expected stability and market-orientation of the coalitions. Positive (negative) market impact means that market participants get reassured (irritated) by the result. CDU/CSU and FDP ? four more years . Chancellor: Merkel. Critical issues: will the FDP enter parliament with a result providing an absolute majority of seats? We think so, as we expect enough conservative voters to ?lend? their second vote to the Liberals. Probability: high. Market impact: positive. SPD and Grüne: Chancellor: Steinbrück. Natural partners who share many positions, for example on taxes and minimum wages. Chancellor: Steinbrück. Probability: low (based on surveys about voting intentions). Market impact: neutral. SPD, Grüne and Die Linke : Chancellor: SPD, but not Steinbrück who excluded that, maybe party Chairman Gabriel. SPD and Grüne rejected such a coalition with or toleration by Die Linke. The SPD might be tempted to change its position after the election if that is the only way to get back to power. We don?t expect that to happen as it would seriously harm the SPD?s credibility. Probability: moderate. Market impact: negative. CDU/CSU and SPD (Grand Coalition). Chancellor: Merkel, as CDU/CSU will probably collect more votes than the SPD. Not the preferred result for most Germans but at least a stable constellation if everything else fails. While the SPD did not exclude entering a Grand Coalition, Steinbrück excluded that for himself. The last Grand Coalition (2005 to 2009) ended in a disastrous election result for the SPD. However, we would still expect the SPD, driven by a sense of responsibility, to enter such a coalition again after some hesitation and debates. After all, as a former SPD chairman once put it: ?Opposition is rubbish (Mist)?. Probability: moderate to high. Market impact: positive. SPD, Grüne and FDP : Chancellor: Steinbrück. Could be possible arithmetically with the FDP > 5% but politically unlikely as all three parties rejected it. If the FDP makes it to the Bundestag, CDU/CSU clearly is the declared and preferred partner. If CDU/CSU and FDP lack a majority, a Grand Coalition seems more likely to us than SPD, Grüne and FDP or SPD, Grüne and Die Linke. Probability: low. Market impact: neutral to positive. CDU/CSU and Grüne: Chancellor: Merkel. While such coalition existed in the state of Hamburg from 2008 to 2010 and still exists in the city of Frankfurt, is seems unlikely on the federal level due to political and personal incompatibilities. Probability: very low. Market impact: neutral. 6. What are the odds for the anti-euro party ?Alternative für Deutschland?? In current polls, the party stands between 2% and 3%. Maybe this underestimates the real support for the anti-euro party, as its opposition to bail-outs and the ECB?s OMT clearly touches a nerve with the population. In general, the German public is pro-Europe, pro-euro, not overly D-Mark-nostalgic while at the same tired of bailing-out countries and slightly irritated by ECB action. The AfD is pro-Europe, anti-euro, anti-bail-out and anti-OMT. It proposes ?an orderly break-up of the Euro area?, stating that ?Germany does not need the euro. The euro does harm to other countries?. In an interview with FAZ, one of the party leaders recommended southern European countries to drop the euro and devalue while Germany should keep it. This is softer than what was heard before, but this softening also poses a problem as it dilutes the party?s unique selling proposition. Ultimately, we expect the AfD to attract less than 5% of voters : too many unknown faces with little political experience proposing something radical on the euro and not much else. Many economists, including ourselves, find it more than difficult to figure out how an ?orderly resolution? of the euro ? ie one that does not create lasting political, economic and financial chaos ? could be arranged. Given current survey results, many potential supporters could consider a vote for the AfD as wasted or may feel that this is not the right time for experiments. Ironically, the more votes the AfD and other below 5%-parties attract, the more likely a euro-friendly Grand Coalition becomes. If we are wrong and the AfD makes it to the Bundestag, we do not think that any of the established parties would invite it into a coalition. The anti-euro position makes it incompatible with the major parties. Should the Pirates succeed against polls and our expectations, we don?t expect them in a coalition, either. 7. Will there be big changes in German fiscal policy after the election? With regard to fiscal policy and more specifically taxes, there is an interesting split between what many outside observes would like the next government to do and what ? some or many ? Germans expect to happen after the election: outsiders are asking for looser policy while insiders are fearing tax hikes. Our guess is that neither wishful nor fearful thinking will be confirmed by reality. From a European, macro-economic point of view, one can clearly argue for a more expansionary fiscal policy (lower taxes, higher expenditure) in Germany. According to Germany?s latest Stability Programme (April 2013), the structural budget surplus amounted to 0.4% in 2012 and is expected at approximately 0.5% from 2014 to 2017. The debt brake (Schuldenbremse), which is part of the German constitution, asks for a structural deficit below 0.35% of GDP as from 2016 at the central government level. This could leave some room for some loosening of fiscal policy. In the best case, that would generate more domestic growth and also support much-needed exports from and growth in southern Europe. German public sector accounts broadly balanced How likely is that to happen? It is unlikely with a new CDU/CSU and FDP government. Even the FDP advocates tax cuts only in the longer run (whenever that may be) while the Conservatives appear strongly committed to consolidation and lowering of the debt level. Here is a telling extract from the Stability Programme , written in Wolfgang Schäuble?s Ministry of Finance (page 20): ? Germany is committed to a policy of growth-friendly consolidation. Sound public finances engender confidence. Together with a competitive economy, they lay the foundation for sustained growth and high levels of employment, which in turn boost the consolidation of government finances.? Sound public finances come first, confidence and growth follow, not the other way round. Why should this ?German view? change with no change in government? In our view, it would only change in the unlikely event of the German economy seriously losing steam. Imagine a severe downswing (not our scenario), caused for example by weaker demand for German exports from Europe or Asia. We have seen in the past what could happen then: after a period of denial, the government would finally come up with a stimulus, putting forward the national interest and stressing that low public deficits fortunately offer the leeway to support the economy. The SPD is committed to the debt brake as well and does not campaign for a large stimulus programme or deficit spending, either. It actually criticized the current government for accumulating too much debt. A Grand Coalition, in our view, would probably bring somewhat higher spending and higher income taxes but would make not a big difference for the overall stance of fiscal policy. We do not expect a second edition of what the popular press called the ?VAT-lie? after the election in 2005. Ahead of the vote, the CDU proposed an increase in the VAT rate by two percentage points, while the SPD didn?t want any change. After the election, the Grand Coalition decided to increase the rate by three percentage points. The economic backdrop to that, however, was public sector deficits of around 4% in 2004 and 5% in contrast to a broadly balanced general budget these days. Those Germans expecting (or many of them fearing) larger tax hikes after the election probably expect an SPD/Grüne/Die Linke government or an SPD and Grüne minority government supported by Die Linke. As we argued above, we consider that a fairly unlikely risk outcome. If it does happen, however, higher income taxes and a new wealth tax will probably come sooner or later, dampening business confidence in and investor sentiment towards Germany. 8. What is the German approach to euro-crisis management … The German government?s approach to the euro crisis is founded on several economic and political convictions some of which are not often spelled out loud by politicians: The crisis was primarily caused by excessive public debt in crisis countries. While this is certainly based on an incomplete analysis neglecting amongst others housing bubbles and private debt, that is just the way many German politicians and economists basically think about what they usually call a ?sovereign debt crisis? (Staatsschuldenkrise). Given the presumed cause of the crisis, restrictive fiscal policy is an unavoidable part of the solution, not part of the problem. It may be a medicine hard to swallow but it is the necessary price to pay for the excesses of the past. Austerity policy must be complemented by growth-enhancing structural/supply-side reforms. Germany played no role in causing the crisis. Maybe it is no coincidence that the German word for debt (Schulden) is almost the same as the word for fault (Schuld). So if a debtor is in trouble it?s basically his fault and obligation to do something about it ? and not the creditor?s who provided the funding. There is a strong moralistic aspect in that view. Euro exit by one or two smaller weak countries might not be a disaster as such. But once Pandora?s box has been opened, it may be impossible to close it before a uncontrollable process of political and economic disintegration starts. Germany certainly does not want to be blamed for causing disintegration in Europe. For many reasons ? economic, financial, political and historical ?, Germany is highly interested in European integration and in a euro area that works. Therefore, it contributes to buying time for crisis countries to ?do their homework?. There are limits to what a central bank committed to price stability should do. A full-blown programme of Quantitative Easing without conditions attached would certainly be beyond the limits. Any solution that might mean higher inflation in Germany is out of the question. It is probably fair to say that most Germans (among those who care) refer the ECB?s 2% inflation target not only to the euro area as a whole but also to Germany. Isn?t the ECB the inheritor of the Bundesbank? Banking Union is a project to prevent future crises, not to overcome today?s. All that results in a cautious, gradualist but also pragmatic approach , very much embodied by Angela Merkel herself. Seen from Germany, the ?policy of small steps? is not a bug, it?s a feature. Whenever problems arise they are dealt with on a ?need-to-do? basis. That?s not visionary, not even very much forward-looking. In practice, the government has nodded through many steps taken by the ECB that are hard to swallow for conservative politicians (and German central bankers) in theory. Also, fiscal policy in southern Europe has been relaxed. But true, Germany has certainly not been a driving force in some of the institutional reforms ? like setting up a Banking Union ? that are widely deemed to be necessary to repair the institutional flaws of the euro area. 9. … and how will it evolve after the election? The short answer to this question is, that support for euro-area partners will probably increase somewhat with a CDU/CSU and FDP government, and somewhat more in a government including or led by the SPD. But don?t expect a 90 degree or even a U-turn. Thorny euro-related issues are likely to be on the table during the next months and quarters. The bail-out programme for Portugal will run out next year and there might be a need for a new one. Greece may face a funding gap. Spain is by no means out of the woods yet. The Banking Union is still work-in-progress. After the election, Germany will still be a decentralized state with many checks and balances including the strong position of the Constitutional Court. The room for manoeuvre for a new CDU/CSU/FDP government would be limited by the fact that the opposition holds a majority in the Bundesrat. As the next regional election is never far away, any new government will have to take bail-out fatigue into account also going forward. We expect the current government to continue its step-by-step approach including moments of pragmatism when circumstances demand it. The SPD does not stand for a completely different policy. While it advocates a growth-oriented economic policy not funded by new debt but by ?fair taxation of financial markets? it does not call for a large stimulus programme or deficit spending in Germany or for Europe and neither does the Green Party. As can be expected, Social Democrats stress the need to create jobs and to alleviate the hardship of unemployed more than the Conservatives usually do. An SPD-led government would probably agree to stretch austerity programmes out over time if needed. The same tendency can be expected in a Grand Coalition. Also, cooperation with the current French president could be easier in a German government including the SPD. So all in all, the differences are more about timing, nuances and tone, not so much about substance. But nuances and tone can make a difference on financial markets. We consider a government including the SPD supportive for peripheral bonds. Remember that the SPD supports the proposal for a European Redemption Fund (for debt exceeding 60% of GDP) put forward by the German Council of Economic Advisers. [1] Moreover, cooperation with the current French president might be easier for a German government including the SPD. In any likely government constellation, German enthusiasm for a full-fledged Banking Union will probably not increase. Eurobonds don?t look realistic to us in the short or medium term. As explained above, we do not consider a government formed by SPD, Grüne and Die Linke likely but we cannot exclude it as a risk scenario. In this case, the SPD would probably have to replace its candidate for chancellor as Peer Steinbrück excluded such a government in a way that we feel is credible. Die Linke is very clear in its draft election programme: ?Programmes to welfare cuts in the European Union are to be stopped immediately?. It also refers to the ?Marshall Plan for Europe? proposed by the Confederation of German Trade Unions. This is a large investment programme for all 27 EU countries over a 10-year period with a size of around 2% of Europe?s GDP, partly funded by ?New Deal bonds?. You can also call it large-scale deficit spending. While this is politically unrealistic under an SPD-led government, there could at least be some movement into this direction. While we are not sure about how bond spreads would react, there would be a clear risk for German Bunds. [1] In 2011, the German ?wise men? proposed a Debt Redemption Fund as part of a European Redemption Pact. Newly issued debt would be joint and severally guaranteed by all euro-area members up to a country-specific limit. Guarantees would come with conditions attached. After a roll-in phase of 20-25 years the Fund would be run down as countries reduce their debt. In contrast to Eurobonds, the Debt Redemption Fund would have a limited life time. 10. Will the Financial Transaction Tax will be dropped after the election? The FTT may be watered down but Germany will probably not drop it altogether ? and certainly not should the next government include the SPD . Remember that SPD, Grüne und Die Linke are actively campaigning for more regulation of the financial industry and taxes on short-term ?speculation?. The declared aim is to make financial markets a safer place and to generate tax receipts that can be invested in education or infrastructure. The fact that only 11 out of 28 EU countries are convinced enough to introduce the tax is considered a drawback but politicians expect other countries to join once they see that it?s working. Whether it will actually work is highly questionable, though. How would a CDU/CSU/FDP government act after the election? Just a quick look back to shed light on Merkel?s evolving view on FTT: At the Pittsburgh G20 meeting in September 2009, then Finance Minister Peer Steinbrück (SPD), backed by Chancellor Merkel, proposed a global financial tax ? an initiative that obviously failed. In spring 2010, Merkel needed the SPD?s votes on the Greek bail-out and abandoned her refusal of an FFT limited to the EU, rebuffing the FDP. Today, the FTT limited to 11 countries is ? a non-prominent ? part of the CDU election programme, while the FDP doesn?t mention the tax in its programme. The FTT is much more all about politics than about not economics . Merkel?s and Schäuble?s view on the FTT can probably be described as pragmatic and tactical. Being pro-FTT makes political sense as it takes away an important election topic from the SPD. In the CDU?s view, the FTT limited to a few countries may not make much economic sense, but it is unlikely ? seen through German politicians? eyes ? to cause too much harm for the broader economy and not even to the financial sector, if exemptions are allowed for specific products and markets like government bonds and pension funds. Most importantly, Merkel might need the SPD deputies? votes in the Bundestag or Bundesrat again. Therefore, with a CDU/CSU/FDP government, dropping the FTT after the election appears less likely than allowing a watered down version seeing the light of day.
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