31 Oct 2017 12:27pm

Merkel must form a coalition

Angela Merkel will be Germany’s chancellor for a fourth term. But her poor result enabled the far-right, anti-immigration AfD to become the third-largest parliamentary party. Analysts from Oxford Economics consider how this could be a major political upset.

Angela Merkel’s most pressing task now is not to knit Europe closer together. It’s to form a coalition. This will prove to be extremely difficult and time-consuming – in 2013 it took 86 days from the election until the new government was in office. None of the five mainstream parties – the Christian Democratic Union (CDU)/the Christian Social Union (CSU), the Free Democrats (FDP), the Social Democrats (SDP), Alternative for Germany (AfD) and the Greens – had campaigned in favour of the two coalition options that are politically feasible. That means there are no shared projects or common understanding of issues that could form the foundation of an agreement. And while there is no alternative to compromise, there wasn’t a lot of appetite for a coalition at various party levels.

That said, Merkel agreed in October to limit the number of refugees Germany accepts to 200,000 a year in a concession to her allies the CSU. That has overcome the first hurdle to coalition talks with other parties. After hours of talks in Berlin the CSU, sister party to the chancellor’s CDU, agreed to not refer to the policy as an “upper limit” or obergrenze, as the CSU had wished, but opted for a softer description, stating that “the total number of the intake based on humanitarian reasons… shall not exceed 200,000 a year”.

There is a broad-based consensus among politicians and political pundits that another CDU/SPD tie-up would be detrimental to the political discourse. For that reason, the SPD has already decided to become the opposition leader. That puts the initial focus on a coalition of the CDU, FDP and Greens – a Jamaica coalition. But that would be a first for the federal government and negotiations will be tough. Not least since the CSU also recorded steep losses and faces a state election in 2018. Recent exit polls showed 57% backing the Jamaica option (good or very good), but only 33% said the same of a grand coalition. The SPD has vetoed that option for now, but we don’t think that will be the final word.

Traditionally, the election winner holds preliminary talks with potential coalition partners to test the waters and see if there is enough room for viable compromises on major issues. We would not be surprised if the government is only up and running just before Christmas or later.

In terms of political substance, the parties making up the Jamaica coalition would probably have a harder time to come to an agreement than the SPD and CDU cobbling together another grand coalition. Given the FDP’s opposition to a eurozone budget, European integration could be the main stumbling block.

But there are other contentious issues: the FDP and the Green party do not see eye to eye on energy policy. They are at different ends of the political spectrum on economic policy and they hold ideological differences. The success of the AfD might push the CSU and parts of the CDU to cater more to the political right. That would be hard to swallow for the Green party. The CDU and SPD have shown that they can govern together and the election campaign showed a lack of clear differentiation. But the SPD is substantially weaker now despite successfully pushing for several of its key priorities, such as the minimum wage during the last term. It will be difficult for the SPD to join a coalition with the CDU. While certain concessions on pension spending, say, could entice the party, these would be painful for the CDU’s pro-business wing.

We think a Jamaica coalition is more likely. But another grand coalition is not impossible despite what the SPD says right now. New elections are only a tail risk, but cannot be excluded, while a minority government is extremely unlikely. Domestically, we think the most significant effect of the next government will be a moderate fiscal easing irrespective of the coalition.

On European policy the outlook is unclear, but the domestic political upset makes European policy a second-tier concern and we doubt that the next German government will change its long-standing cautious and incremental approach. Germany has become more polarised and in that sense more European.

Oliver Rakau
is chief German economist at Oxford Economics