Fra BNP Paribas:

GERMAN ELECTIONS – STATES OF THE NATION?
KEY MESSAGES
October’s two state elections in Germany might have
significant repercussions for national political stability, in
our view.

While it is not our central case, we see a risk that
Chancellor Angela Merkel might eventually be replaced by
her party.

The votes might also provide an indication of continentwide
trends in support for Eurosceptic parties ahead of
the European Parliament elections of May 2019.
Whether or not the Eurosceptic Alternative for Germany
is successful at the ballot boxes this month, we think its
influence is already making it harder for the German
government to make meaningful concessions on
eurozone reforms.

Germany’s ruling centre-right/centre-left coalition is fragile,
in our view, and Chancellor Merkel’s authority is diminished.
Were this month’s votes to show a surge in support for
Alternative for Germany (AfD) or heavy losses for the ruling
coalition parties – in particular, the Christian Democratic
Union (CDU) and its Bavarian sister party, the Christian
Social Union (CSU) – political instability might return.
In that event, we think the CDU might eventually replace
Chancellor Merkel in an orderly leadership transition. That
would be more likely, in our view, than a government
collapse brought about by the CSU or Social Democrats
(SPD).

EU-wide implications: A strong result for the far-right AfD
might have repercussions for the whole of Europe ahead of
the crucial European Parliament election in May 2019 if it
reinforces a continent-wide trend towards Euroscepticism

The ruling centre-right/centre-left coalition is fragile, in our
view, and Chancellor Merkel is under pressure. The 2015
refugee influx and the poor performance of the coalition
government – along with persistent socio-economic trends –
have resulted in a decline in support for her centre-right Christian
Democrat group and their SPD coalition partner and in the rise of
the far-right Eurosceptic AfD.

State elections could be a catalyst for change. Were the
elections to trigger significant realignments, we think these
would be more likely to arise from within the CDU rather than
from a coalition partner ousting Mrs Merkel.
 The arithmetic within the federal parliament after the 2017
election would make it hard to form an alternative majority,
as illustrated by last autumn’s failed negotiations for a
CDU/CSU coalition with the Greens and Free Democrats.
No politically feasible majority is possible without the
CDU/CSU.
 The CSU and SPD are unlikely, in our view, to withdraw
their support from the CDU-led coalition. Indeed, none of
the ruling parties (or their respective MPs) have an interest
in triggering an early election. Polls suggest they would all
be likely to lose vote share.
 We do not expect a repeat of the summer’s challenge from
the CSU, even if it suffers a severe blow in the Bavarian
state election. In our view, the CSU triggered a coalition
crisis over a symbolic immigration-related issue in response
to pre-election pressure from the AfD; after the vote, there
would be much less incentive for something similar. In any
case, bringing down a CDU-led government would probably
come at a prohibitive political cost.

Chancellor Merkel might relinquish the party leadership but
remain at the helm of government, although an internal
leadership contest ousting her is also not inconceivable.
Stability ahead of the European Parliament election argues
against change, however. Even if the AfD does as well (and
the CDU/CSU as badly) in October’s state elections as polls
suggest, we think the national coalition government could
remain in power with Chancellor Merkel at the helm.

German voters overall prefer stability and Chancellor Merkel
still commands the confidence of a significant part of middleground
voters. What is more, the CDU/CSU will probably want
to signal stability ahead of May’s European Parliament
elections. In the event that the Christian Democrats suffer a
setback in the EP election, there would still be time before the
next general election in autumn 2021 to field a new candidate
and change course, if need be. Mrs Merkel might even
complete her term as chancellor having handed over the party
leadership to an ‘heir apparent’ who would contest the next
election.

Beyond the elections, the influence of Euroscepticism is
already being felt. A major consequence of the AfD’s rise and
the weakness of the political centre, in our view, is that it has
made it much harder for the German government to agree to
concessions as part of eurozone reforms. It was always going
to be challenging to agree on the risk-sharing elements
required to make the euro more stable, namely common
deposit insurance and a fiscal stabilisation capacity (see EU
elections – Come what May, 3 October). But we think it is all
the more difficult now that the German government is having to
keep one eye on populist opposition at home and is itself weak
internally.

Chancellor Merkel’s eurozone policy – epitomised for the
German public in the highly unpopular Greek bailouts – has
been one of the factors fuelling discontent among voters,
particularly those on the conservative-nationalist spectrum.
Indeed, the AfD was created out of discontent with these very
policies.