Head of Macro Analysis
Summary: Last night's first TV debate between the three lead candidates (Spitzenkandidaten, in German) have confirmed the current momentum in German election campaign. The SPD is on the rise, overtaking the Greens in most polls, while the CDU/CSU continues its fall from grace. The race is more open than ever. We think the next government will be a three-party coalition led either by the centre-right CDU/CSU or the centre-left SPD. A Green chancellor is a remote possibility, in our view. In terms of economic implications, we expect German fiscal policy to turn modestly more expansionary after the election. But a reform of the debt brake introduced in 2009 following the Global Financial Crisis is unlikely.
Advantage Scholz : SPD’s Olaf Scholz is the clear winner of yesterday’s TV debate. According to a Forsal opinion poll released just after the debate, 36% of viewers said Scholz had « all in all won » against 30% for the Green candidate Annalena Baerbock and only 25% for CDU/CSU candidate Armin Laschet. The audience’s decision on the question « Who do you most likely trust to lead the country ? » was even clearer. Here 47% voted for Scholz, 24% for Laschet and 20% for Annalena. The result of the question « Who did they find the most likable » was similar. Scholz confirms its status of most popular candidate (38%) while Laschet collects the fewest sympathy points (22%). For many voters, Scholz has emerged in recent weeks as the only obvious successor to chancellor Angela Merkel. In contrast to Laschet and Baerbock, he has not make any personal mistakes since SPD delegates overwhelmingly voted for him as candidate for the September election in past May. In addition, he showed strong leadership during the flood crisis. It obviously leaves its marks on the SDP’s performance in the polls (see the below chart).
« Jamaica » or « Traffic light »? The risk of an inconclusive election result with no clear winner is increasing as we are getting close to election day. The only certainty is the next governement will be a three-party coalition. There are two main coalition options : a Jamaica coalition (CDU/CSU, Free democratic party and Greens) and a Traffic light coalition (SDP, Greens and Free democratic party). The Greens and the pro-business Free democratic party will be the kingmakers in this election. The Greens are traditionally politically closer to the SDP, while the Free democratic party is closer to the CDU/CSU. But nothing is set in stone. The continuity of the grand coalition, which has governed Germany in recent years, is unlikely in our view. A majority of voters reject this option in recent polls. Expect long and intense negotiations to form the next governement. Outgoing chancellor Merkel could still be in the office in year-end.
A slightly more expansionary fiscal policy: No matter the outcome, we don’t expect a fiscal revolution in Germany after the election. The need to form a three-party coalition implies important concessions will be made. The risk is the next government will achieve little. Our baseline is Germany’s fiscal policy will be modestly more expansionary in the coming years to focus on green investment, especially if the Greens are part of the coalition government – which is probable based on current polls. A dedicated green investment fund could be created. But the introduction of a wealth tax is not a done-deal, for instance. A reform of the debt brake, which limits the Federal Government’s structural net borrowing to 0.35% of gross domestic product, is unlikely since it would require constitutional amendments. But a more gradual re-introduction could be a possibility.
What to watch now: Besides the polls, we are focused on the upcoming TV debates on 12 and 19 September. It is still early days. The main candidates are neck-to-neck. The two debates left can change the dynamics of the race.
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