German Election Update: A new era?

German Election Update: A new era?

Macro
CD
Christopher Dembik

Head of Macro Analysis

Summary:  Yesterday's last TV debate between the three lead candidates (Spitzenkandidaten, in German) confirmed the current momentum in the German election campaign.


The centre-left SDP leads Refinitiv’s polling aggregate by four points over the CDU/CSU after rising more than nine points in the last eight weeks. Assuming there are no last-minute surprises, the SPD candidate, Olaf Scholz, is well-positioned to succeed Angela Merkel as German chancellor. Consequently, we expect the domestic fiscal policy to turn more expansionary, targeting both green investment and digitalisation. In terms of European implications, it could open the door to a reform of the rules of the Stability and Growth Pact (SGP). But a reform of the debt brake introduced in 2009 following the Global Financial Crisis is unlikely.

Two government options: The last TV debate confirmed the current trends in the German campaign. According to the latest Forsa opinion poll (see chart below), support for the SDP is at 23.6% - far ahead of the CDU/CSU (19.3%) and the Greens (17.3%). The pro-business FDP (Free Democratic Party), which could play kingmaker in this election, is stable at 12%. This confirms the trend of Refinitiv’s polling aggregate mentioned in the introduction. My non-scientific guess is that the next government will certainly be a coalition of the SPD, the Greens and the FDP – the so-called Traffic Light coalition. Another option could be a Jamaica coalition between the centre-right CDU/CSU, the Greens and the FDP. But CDU Armin Laschet’s low popularity is a major obstacle. Expect tough government-forming negotiations.

No changes to the debt brake: A reform of the debt brake, which limits the Federal Government’s structural net borrowing to 0.35% of gross domestic product, is unlikely. It would require constitutional amendments. In addition, this is one of the two red lines along with no tax hikes drawn by the FDP. The SDP, the CDU/CSU and the Greens are fine with it. They will probably discuss a green investment package which would not be part of the budget. A more gradual re-introduction of the debt brake is a possibility too.

Green is the new black: German politicians acknowledge there is an urgent need for more investments, especially to reach a low-carbon society. The Greens advocate for €500bn in climate change investment over the next ten years (about 1.5% of GDP per year). The SPD has been less explicit. It seems to aim for something around 1% of GDP in green investment. The CDU and the FPD don’t put a number on it. But they also call for sizable green investment. With the risk of a major energy crisis hitting Europe hard this winter (see “For how long equity markets can ignore the energy shock?”, by Peter Garnry, 14 September 2021), we expect the next government will create the right conditions to stimulate the green transition. In our view, funds should be allocated to controllable renewable energy (hydroelectricity and biomass) and not to variable renewable energy (wind power and solar power). The former must be an integral part of the energy mix. The latter is not useful since it is not able to supply a steady supply of electricity. Hopefully, the next government will also backpedal on the decision to exit nuclear power.

Digitalisation and other investments: We believe the next government will create incentives for the private sector to do investments, especially for the digitalisation of the economy. Much more efforts will be needed to modernize and digitize the country’s administration. The pandemic served as a wake-up call for many. People had issues working from home due to patchy internet connections. Schools lacked basic technology for remote learning, for instance. This is due to a persistent lack of public investment over the past ten years. But it is also partially explained by the division of power enshrined in the constitution. Germany's sixteen states shape their own policies on areas including health, culture, and education. The creation of a ministry of digital affairs could improve coordination between the federal government and states.

Welcome changes for the EU integration: A Traffic Light coalition government would have more positive implications for European integration and EU-level fiscal spending than a Jamaica coalition. We could see a pace for the reform of the rules of the SGP to allow for more public investment, in the future. We could also see faster implementation of an EU digital tax and a minimum global tax. It would put less pressure on the European Central Bank to exit emergency monetary policy measures too.

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.