Who said boring?
The basic story of the German election has been told many times by now. Chancellor Angela Merkel has enjoyed a comfortable and stable lead in the polls for several months. It would need a miracle or wrong polling for her not to win the elections. The second place will most likely go Merkel’s primary challenger Martin Schulz and his SPD. The race for number three, however, still remains open.
Currently, the liberal FDP and the AfD seem to have the best chances to make it but also for the Greens and the Linke – even though currently slightly behind in the polls – position number three is still at an arm’s length.
In our view, the biggest impact of the German elections will be on Europe and the future of the Eurozone
Also, judging from the parties’ statements and economic plans, no matter what the next German government looks like, expect some fiscal stimulus (mainly targeted at investments), some income redistribution and somewhat more tolerance for higher wages. Obviously, the scale of these effects varies between the different coalition options but the biggest impact, in our view, will be on Europe and the future of the Eurozone.
The range of political and policy proposals is extremely broad, so here is what we will be watching on Sunday evening and the days after.
1 Makeup of the coalition
According to latest polls, there currently are only two coalition options: a continuation of the current grand coalition (CDU and SPD) or the unprecedented 'Jamaica' coalition (CDU, FDP and Greens). Both options don't receive much enthusiasm. A weak SPD looks unlikely to have a strong appetite to join another coalition with Angela Merkel.
In this regard, watch the SPD’s final result. Anything close to 20% will make participation in the next government unlikely, but anything more than 25% will turn the tables. At the same time, the Greens and the FDP have been fighting each other during the election campaign and look unlikely to form a stable government, at least not one from the heart. According to recent polls, only 4% of the German population prefers the 'Jamaica' option. Only 14% favour a continuation of the current coalition. The majority (23%) favours a coalition of CDU and FDP.
2 Unprecedented minority government
The difficulties in forming a coalition could lead to a precedent in German politics: a minority government at the federal level. If election day confirms the current polls, we won't rule out the possibility of eventually seeing a minority government in Germany.
Either in the form of a coalition of the CDU and FDP or, in case Merkel ends up winning more than 40% of the votes, then a minority government of the CDU on its own.
3 What about the AfD?
Remember that in the first half of 2017, markets were constantly talking about the populist threat in the Eurozone. After the Dutch and French elections, this threat seems to have disappeared. No one seems to have an eye on the AfD.
If the AfD manages to come in as third largest party, it could not only be the official opposition leader (in case of another CDU/SPD coalition) with special rights in the German parliament but would also show even Germany is not immune against right-wing populism. Just to put it into perspective: Geert Wilders received some 13% of the votes in the Dutch elections and markets were scared. The AfD currently ranges between 10% and 11%.
4 Size of parliament
The German parliament does not have a fixed number of seats. Due to the election system (a combination of regional and federal votes on Sunday, direct votes and party lists), the number fluctuates. Given that for the first time in German history, six parties are likely to enter parliament, the number of seats is expected to climb to 675, from 630. The highest number of seats ever reached so far stands at 669 in 1998. As a reminder, the European Parliament currently has 751 seats.
So, if even the entire election campaign looked rather dull and unexciting from the outside, election day this Sunday may still have some surprises up its sleeve. Stay tuned.