German election more open than ever | Calamatta Cuschieri

The German federal election will take place on 26th September with the outcome uncertain like never before.  For the first time in the history of the Federal Republic, the incumbent is not up for re-election.  Over the past 16 years, Angela Merkel has stood for continuity and reliability in German politics – especially abroad.  As Germany is the pivotal economy in Europe, accounting for nearly 30% of Eurozone GDP, its outcome will strongly influence the future of the continent.

There will be six political parties contesting the election.  Germany’s electoral system makes it difficult for any one party to form a government on its own, meaning that coalition governments tend to be the rule.  During the election campaign, three parties have become equally strong.  Besides the traditionally strong Christian Democrats and its sister party, the Christian Socialists  (CDU/CSU) of the incumbent and popular Chancellor Angela Merkel, the Green party, led by Annalena Baerbock, has been able to profit from both frustration with the current government and the popularity of addressing climate change. 

Merkel’s decision not to run again for office and a longish dispute over her successor has weakened the CDU/CSU’s election chances, as well as its front runner Armin Laschet.  Moreover, the Social Democrats (SPD) has been able to benefit from a disciplined campaign, positioning Vice Chancellor Olaf Scholz as a moderate and experienced political leader who enjoys an incumbent bonus.

In addition to the CDU/CSU, SPD and the Greens, which all stand a good chance to gain between 17%-25% of the seats in the newly elected Bundestag (the German parliament), the remaining three parties each have a good chance to enter the parliament by winning more than 5% of the popular vote or three electoral districts. These are the far right AfD, the liberal FDP, and the far-left Left.  However, it is worth noting that all parties have ruled out forming a coalition with the right-wing AfD.

According to latest polls, a majority in the new Bundestag will only be possible via a three-party coalition, which would stretch across the left-right political divide in most cases.  The exception is a left-leaning, Green-red-red coalition consisting of the Greens, SPD and the Left, which now has an arithmetical possibility to form a government boosted by the SPD campaign momentum.  The policies of such a left alliance would deviate the strongest from the current status quo.

The key issues on the government’s agenda in the coming legislative period are climate change and fiscal policy.  On climate change, the heart of the matter is the reduction of greenhouse-gas emissions, and above all the CO2 reduction target.  The issue is hardly controversial, however, as the German parliament passed the Climate Protection Act 2021, bringing forward the goal of net-zero greenhouse-gas emissions from 2050 to 2045.  The major differences between the parties is how to reach that goal, with the CDU/CSU and the FDP relying more on R&D and innovation, while the Greens, SPD and the Left are relying more on bans, limits and quotas.

The greatest differences between the left-wing and the conservative parties are in fiscal policy.  While the latter pledge a lower tax burden through the full abolishment of the solidarity surcharge tax, and lower personal and corporate taxes, the left-wing plans to raise taxes for top earners and reintroduce a wealth tax.  Another bone of contention is on the so-called “debt brake” policy, which limits the government’s ability to pile up debt by requiring an annual budget deficit below 0.35% of GDP.  While the Greens want to loosen the debt rules to fund their plans toward a greener economy, the Left is ready to discard it altogether.   By contract, the CDU/CSU want to return to a balanced budget, or “black zero” as quickly as possible and re-impose the debt brake.

Although there is great uncertainty regarding the outcome of the elections, the possible coalitions and the agreements they could reach, not that much is expected to change.  This is because there is already a broad consensus in Germany on important issues (such as climate change and Europe) and because the government’s power is constrained by the legislature.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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