Fra BNP Paribas:
The German Social Democrats’ decision to enter a new grand coalition government with the
Union parties eases uncertainty and is likely to be welcomed by markets.
Angela Merkel is expected to be approved as chancellor at the Bundestag session on 12–16. March, with the new government likely to be formed swiftly afterwards.
The focus of the new government looks set to be deeper European integration and stronger cooperation with France.
The majority of the Social Democratic Party (SPD) base agreed in an internal ballot to enter another grand coalition with the Christian Democratic Union (CDU) and the Christian Social Union in Bavaria (CSU). The outcome of the vote had looked uncertain, with deep internal divisions over the matter; in the event, 66% of the party members backed the coalition agreement, compared with 76% in 2013 ahead of the outgoing CDU/CSU–SPD coalition.
The turnout was about 78%, stable on 2013. The relatively comfortable margin of victory should strengthen the SPD party leadership, which has been firmly promoting the grand coalition. We expect a new government led by Angela Merkel to be formed swiftly. The current SPD caretaker leader, Olaf Scholz, is to become finance minister and vicechancellor; the party is also due to take post of foreign minister.
The coalition programme agreed by the party leaderships includes measures to promote fiscal integration in the eurozone, which might bolster confidence in potential support during the next growth slowdown. Specific policies also include a joint response with France to US tax changes, a minimum EU corporate tax rate and action on ‘wage dumping’ in economically weaker member states.
January’s preliminary agreement laid out economic and fiscal policy guidelines including discretionary fiscal softening of EUR 46bn (equivalent of 1.4% of 2017 GDP) until 2021 in both higher spending and a lower tax burden. The relatively small package should not have a major impact on growth and/or inflation, although some pass-through from higher spending would bolster our expectations for a very robust German domestic demand outlook.
The result removes a great deal of uncertainty with respect to both the German and European policy outlook and should be good news for markets. Beyond the immediate relief, though, we believe this new grand coalition might eventually prove less stable than the previous ones. Both the SPD and the Union parties have been steadily losing popular support, particularly to the right-wing Alternative for Germany (AfD).
Since the SPD decided to start coalition talks with the CDU/CSU, its support has dived below 20%; some recent polls suggest the SPD is already trailing behind AfD (see Chart 1). At 32–34%, the support for the Union parties remains pretty low, too, compared with the period prior to the September 2017 Bundestag election. Further erosion in voter support might eventually increase tensions between the coalition partners, especially in the approach to key regional elections (such as that in Bavaria this autumn).
