German Election Leaves Analysts Divided

Candidates for the German Chancellorship line up for a TV debate on Sept. 19. Germans head to the polls on Sunday.

After 16 years as German chancellor, Angela Merkel’s reign is coming to an end. As Germans head to the polls on Sunday to elect her successor, opinions remain divided over the impact a change of government may have on German policy.

Erik Nielsen, group chief economist at UniCredit, believes “significant changes are likely to come in German policies as a result of the election.” For one, he highlights the issue of the debt brake–a German government instrument used to enforce a balanced budget. Any changes to this could critically impact public investment, he says. This would become particularly significant when determining Germany’s commitment to climate change, Mr. Nielsen notes.

The Green Party, polling at 16% according to Citi, advocates altering the debt brake to finance its proposed investment of 500 billion euros, equivalent to $584.4 million, in climate policies over the next 10 years. Meanwhile the Social Democratic Party (26%), the Christian Democratic Union (21%) and the business-friendly Free Democrats (12%) are similarly calling for a sizable green investment, but have fallen short of outlining a budget or querying the constitutional debt brake.

“Without a doubt, changing the constitution would be the honest and most transparent way of dealing with the dilemma. But my guess is that it will remain politically impossible to do, particularly under an SPD government led by Olaf Scholz with a hostile CDU in opposition, blocking the government from reaching the necessary two-thirds majority,” Mr. Nielsen said. Regardless, he expects a significant lift in public investment in the years to come of around 1.0% of GDP.

Other analysts agree that public investment will rise following the election, regardless of the outcome. Jacob Kierkegaard, senior fellow at the Peterson Institute for International Economics, expects a rise in spending on a number of issues in addition to climate, such as digital infrastructure, healthcare, and education. “I expect this amount to be at least 1% of GDP a year, and that this change will happen irrespective of who forms the next government,” he said.

Holger Schmieding, chief economist at Berenberg, similarly expects that “under most plausible scenarios, Germany’s ongoing tilt toward a more fiscally relaxed, centre-left and greener policy stance would continue.”

According to some analysts, however, changes in German policy will vary depending on the victors of Sunday’s election–an election which, as Naz Masraff at the political risk consulting firm Eurasia Group says, “is still wide open.” By their calculations, an SPD-led “traffic light coalition” with the Greens and the FDP–named after the parties’ respective colors of red, green and yellow–is now the most likely outcome, with a 40% probability, and a 55% likelihood that the SPD’s Olaf Scholz will be chancellor.

This eventuality, also forecast by Citi, “would combine some tax cuts and supply side reforms with higher CO2 prices and more public investment. The FDP would put the breaks on tax hikes but also on more eurozone fiscal integration,” the bank’s Christian Schulz said.

Meanwhile, according to a survey of economics professors at German universities by the Ifo Institute and Frankfurter Allgemeine Zeitung, a traffic-light scenario would mean a more limited impact on economic growth, inequality, the public debt ratio, the unemployment rate, and carbon emissions than under alternative coalitions. Of the survey’s participants, 44% said a coalition consisting of the CDU, the CSU and the FDP would mean the highest economic growth, while 83% believe an SPD-Greens-Left Party government would lead to the lowest.

Concerning the reduction of Germany’s dependence on exports–one of the main challenges the next government will face–the Peterson Institute’s Jacob Kirkegaard favors a traffic-light or red-green coalition. Since these would oversee the largest boost to public investment and push for few additional taxes or industrial restrictions, either coalition would be best placed to face this challenge, he said.

Still, any changes to policy resulting from the election would be unlikely to significantly impact the economic outlook of Germany or Europe as a whole. As Nick Nelson, UBS head of European equity strategy, suggests, changes to fiscal spending or green initiatives will hardly be unique to Germany following the election, as most other European countries will be implementing similar measures, even without a change of government.

Furthermore, UBS chief German economist Felix Huefner told The Wall Street Journal that even these policies will face the ultimate challenge of postelection politics: compromise. “If there is to be a three-party coalition as opinion polls suggest, there will need to be a lot of compromises struck to form a government, in particular if such a government involves both the Green Party and the liberal FDP party, since the overlap in their policy proposals is limited,” he said.

For other more substantial policy changes, such as relaxing EU fiscal rules, increasing the minimum wage and imposing rent regulations, it may be even more difficult to achieve compromise, with limited overlap on party proposals, Mr. Huefner added.

Following Sunday’s election, coalition negotiations are likely to extend well into the end of 2021, according to UBS head of research for Germany Sven Weier. While extended deliberations of this sort can often lead to uncertainty, Mr. Weier anticipates a relatively smooth transition given the variety of coalition options available.

Ultimately, he expects stability to prevail in markets after the election.

Write to Maria Martinez at