Germany's coalition options down to one after a long election night

In our first take on the election results, there were still three possible coaltions remotely likely. WIth the preliminary official result, this has come down to one: a revivial of the grand coalition between the CDU/CSU and SPD. Still, after its worst election result ever, the SPD will not easily move into a government coalition as junior partner to the CDU/CSU. The party is likely to now enter a new era of political leadership and another existential crisis. Also, any coalition agreement will probably have to pass a grassroots vote. Still, eventually the SPD will budge, as a grand coalition is the only feasible option for the CDU/CSU to form a government. The only other option would be a coalition with AfD; a scenario Friedrich Merz had strictly ruled out.

Last night, Merz announced that he would like to form a government before Easter. This should now be possible. Still, a lot of the success of the next government will depend on willingness from individual parties and leading politicians 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 such a coalition will be to prevent the AfD from winning the next election – a likely scenario if the next government doesn’t succeed. In this regard, stricter immigration rules are a more likely outcome than agreement on economic policies.

In short, a revival of the grand coalition could bring tax cuts for households and corporates without cuts in social expenditures, as well as some deregulation. A reform of the pension system looks highly unlikely. The biggest challenge will be the financing of any new plans. Remember that the CDU/CSU had presented plans with a large funding gap during the campaign. However, we had always suspected the CDU/CSU would change its stance on the debt brake after the elections. With the Left and the Greens, there would now even be a 2/3 majority in parliament for outright changes to the debt brake. In any case, another grand coalition is likely to agree on investments in infrastructure and defence, either via a special purpose vehicle or changes to the debt brake. Germany could even open up for more European efforts to fund defence and infrastructure spendings.

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 today. The more positive psychological effect of the change of political leadership could be quickly offset and dampened by complicated coalition negotiations. The risk is high that after election night, the longing for a significant overhaul of the German economy will persist; it's hard to see the next government being 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.