German elections bring complicated coalition talks

No matter how the next government will look like, a lot will depend on the individual parties’ and leading politicians’ willingness to leave personal and party interests behind and focus on getting the economy out of its structural stagnation. This would also imply leaving some political holy cows behind. This is a feasible scenario if the main motivation of any such coalition will be to prevent the AfD from winning the next election – a likely scenario if the next government doesn’t succeed. In this regards, stricter immigration rules are a more likely outcome than agreement on economic policies.

CDU/CSU and SPD

A revival of the grand coalition could bring tax cuts for households and corporates without cuts in social expenditures as well as some deregulation. Outright changes to the debt brake are unlikely but a special purpose vehicle for infrastructure and defence funding should be possible. Germany could even open up for more European efforts to fund defence and infrastructure spendings.

CDU/CSU, SPD and Greens

A very complicated coalition with a high likelihood of not surviving the full four-year term. Tax cuts for households and corporates without cuts in social expenditures as well as some deregulation should also be possible – as well as a special purpose vehicle for infrastructure and defence. However, little agreement on energy policies could keep energy prices too high. For Europe, such a coalition could – with some delay – be the best possible outcome, opening the door to more European efforts to fund defence and infrastructure spendings.

CDU/CSU, SPD and FDP

Same tax cuts as in the other two options with at least a promise to look into possible expenditure cuts. Less investment initiatives as the FDP would limit fiscal space. Interestingly, FDP leader Christian Lindner kept the door open tonight for special purpose vehicles. Fiscal room would probably be open for defence but not necessarily infrastructure investments. For Europe, such a coalition would bring a return of German fiscal frugality.

All in all, an exciting election evening will lead to more excitement over the coming days and weeks. The longing of many Germans and Europeans for German political and economic stability will not end tonight. The positive more psychological effect of the change of political leadership could be quickly offset and dampened by complicated coalition negotiations. The risk is high that after tonight, the longing for a significant overhaul of the German economy will last much longer. It is hard to see that the next government will be able to deliver much more for the economy than a short-lived positive impact from some tax cuts, small reforms and a bit more investment. That is, unless the next government has really read the sign of the times.