Merkel Speaks to SPD in Search of Post-Election Ally

German Chancellor Angela Merkel approached her Social Democratic opponents as she began the search for a third-term coalition partner to leverage the biggest electoral victory in 23 years.

Merkel opened the jockeying saying she had “initial contact” with SPD chairman Sigmar Gabriel. She also allowed for negotiations with the smaller Greens party, which said it was ready to deal for a share of power in Europe’s biggest economy.

“We are now open to talks,” Merkel, 59, told reporters today at the Berlin headquarters of her Christian Democratic Union party. “Germany needs a stable government.”

The chancellor, who has dominated the response to Europe’s debt crisis, heads into coalition-building with a strengthened hand after yesterday’s election gave her the biggest tally in any federal vote since Helmut Kohl’s post-reunification victory of 1990. After campaigning on the economy and her handling of the euro-area crisis, she said three times at today’s news conference that she won’t change course on European policy.

Polls suggest that a Christian Democrat-SPD alliance as Merkel headed in her first term from 2005 to 2009 has the most support from voters and “they will almost certainly get their wish granted,” Holger Schmieding, chief economist at Berenberg Bank in London, said in a note to clients. “The impact on policy will be small, with hardly any change on the European level and a modest tilt towards a center-left agenda at home.”

Euro Drops

The euro fell 0.3 percent to $1.3488 at 4:30 p.m. in Frankfurt. The benchmark DAX Index, which has gained 13 percent this year, dropped 0.5 percent.

Merkel said the SPD’s Gabriel asked her to hold off until his party leaders meet on Sept. 27 to consider coalition options. Coalitions are the rule in the German political system and negotiations usually last from four to six weeks. Merkel faces compromise on taxes, wages, the transition to renewable energy from nuclear power and possibly on bailout policy.

“There is no foregone conclusion in the direction of a grand coalition,” Gabriel said at his press conference an hour after Merkel’s. “It’s not for us to be concerned with forming a majority. That’s up to Mrs. Merkel. She has to say how she wants to make policy in Germany.”

Roesler Quits

Merkel’s Christian Democratic bloc fell five seats short of a majority in the 630-seat lower house of parliament, leaving it in need of a partner after voters threw out her Free Democratic allies. FDP leader Philipp Roesler, the vice chancellor, quit his party post after overseeing its worst defeat since postwar West Germany’s founding in 1949.

Peer Steinbrueck, the SPD’s chancellor candidate, suggested his party would press Merkel for “progress on the banking union” at European Union level, including a restructuring fund for failing lenders financed by banks.

The Greens “are of course ready to hold talks” if approached, co-head Claudia Roth said. While the party advocates an expansion of renewable energy, its call for higher taxes clashes with Merkel.

Coalition talks “will require difficult steps, because the party platforms were very different,” Armin Laschet, a deputy chairman of Merkel’s Christian Democratic Union, told Deutschlandfunk radio.

Merkel’s CDU and its Bavarian affiliate, the Christian Social Union, took 41.5 percent compared with 25.7 percent for the SPD, according to official returns from all 299 districts. The FDP had 4.8 percent, short of the 5 percent needed to enter the Bundestag, Germany’s lower house.

Jobless Example

During the campaign, Merkel said that insisting on reforms in euro countries that received aid was the only way to raise Europe’s competitiveness, citing the fall in German joblessness from a post-World War II high of 12.1 percent in 2005 following a labor-market overhaul. The German unemployment rate is now 6.8 percent compared to 12.1 percent in the 17-nation euro region. German 10-year bond yields are 1.94 percent, while comparable U.K. gilts yield 2.91 percent and U.S. debt 2.70 percent.

“The economy would be a really difficult area” in talks with the SPD, Christine Lieberknecht, a member of the CDU executive committee and premier of the eastern state of Thuringia, said in a Sept. 19 interview. She cited taxes and regulation, bailout policy and education as areas of dispute.

Junior Partner

Should Merkel seek a coalition with the SPD, the party’s leadership will need to persuade its rank and file to join the chancellor in government. As a junior partner, the SPD would effectively be putting its fate in Merkel’s hands. Their previous partnership ended in 2009 with the SPD’s worst postwar result, 23 percent, a tally many in the party blame on the grand coalition and an inability to win credit for policies in a Merkel government.

“It’s a very difficult question for us and it certainly won’t be answered today,” Thomas Oppermann, the SPD’s parliamentary whip, said in an interview with N-TV.

Like the Greens, the SPD campaigned on raising taxes on top earners, a measure that Merkel rejected as “poison” for the economy. The SPD has also called joint euro-debt liability inevitable. Merkel has stood against such risk-sharing throughout the debt crisis, saying that would remove pressure on indebted states to balance their books.

While Germany’s first chancellor from the formerly communist east again made history with her election score, a third term takes her into uncharted waters to face the perils of a third Greek bailout and a potential breakdown in her 550 billion-euro ($743 billion) energy overhaul.

Bundestag Expulsion

The FDP’s expulsion from the lower house, or Bundestag, was the first such defeat since the first elections of the postwar period in 1949. The Greens, with which the SPD governed from 1998 to 2005, took 8.4 percent, and the Left Party got 8.6 percent. The anti-euro Alternative for Germany had 4.7 percent.

Merkel was first elected in 2005, yet it was the euro-area debt crisis spreading from Greece from 2009 that dominated her second term and may dictate her political legacy. Her election showing compares with Kohl’s 43.8 percent in December 1990, two months after East and West Germany merged. She’s now set to follow Konrad Adenauer, Kohl and Helmut Schmidt as a three-term leader.

Germany’s benchmark DAX Index has returned 68 percent since Merkel became chancellor in November 2005, compared to a 15 percent decline in the Euro Stoxx 50. In the same period, the government bonds returned 40 percent; inflows amid the region’s crisis resulted in investors occasionally paying to hold its two-year debt.

“With the strong result for Merkel, Germans have again demonstrated their overwhelming support for pro-euro policies,” said Berenberg Bank’s Schmieding.

Before it's here, it's on the Bloomberg Terminal.