German Coalition Options: Political Reality, Risk, Repercussions

  • Renewed alliance with SPD remains likeliest outcome for Merkel
  • Moves toward greater European Union integration are at stake

Merkel's Election Challenges

Chancellor Angela Merkel’s opinion-poll lead of close to 15 percentage points is shifting the focus in the final days before the German election to the question of which of three parties -- the Social Democrats, the liberal Free Democrats and the Greens -- will be her coalition partner, or partners, and what that might mean.

All are bracing for a lengthy period of soul searching, with talks due to start early in October and last possibly until Christmas. Merkel’s Christian Democratic Union and its Bavarian Christian Social Union ally will talk to potential partners before any decision on entering formal coalition negotiations. And that decision isn’t expected before a regional election in Lower Saxony on Oct. 15, because nobody wants the national discussions to affect the result of that state vote.

Another Grand Coalition Still Top Option

Merkel has made no secret of the fact that she’s worked well with the Social Democrats over the past four years, saying during the campaign she’s proud of what both parties have achieved. But the SPD is less certain of the merits of what would be a third grand coalition under her.

After the past four years as junior partners, the Social Democrats have been unable to regain the levels of support they once enjoyed, even with a new leader, Martin Schulz. But while many grassroots members would prefer to go into opposition, Schulz has started to prepare the ground for another grand coalition by laying out his conditions. 

Free nursery schooling, equal pay for women, no cuts in pensions and a pro-European Union stance are “nonnegotiable conditions” for an SPD role in a new government, Schulz has said. Those comments are seen as a clear sign that the SPD leadership is not only ready for a new alliance with Merkel, but willing to set a low bar if it performs poorly in the election. “These red lines are really nothing huge,” Merkel’s parliamentary caucus leader, Volker Kauder, said Monday.

But a grand coalition is not a done deal. Should the SPD take less than 23 percent of the vote Sunday, a result that would mark a postwar low, the leadership would run into difficulty getting the blessing of its rank-and-file to continue the present government, according to a longstanding Social Democrat member.

“Our base case remains a grand coalition, but it is no longer as clear-cut as it once was,” UBS analyst Ricardo Garcia wrote in a note to clients this week, putting the chance of a CDU-SPD tie-up at 60 percent. Another term for the alliance would help to improve the Franco-German relationship, raise the prospect of a euro-area finance minister and a European Monetary Fund. “We believe European integration will deepen in the next legislative period, as support for the euro hits record highs, despite the U.K.’s exit from the EU,” Garcia wrote.

The Unprecedented Triple Alternative

A tie-up between the CDU/CSU, the Free Democrats and the Greens -- the “Jamaica coalition” because the parties’ colors are those of the Jamaican flag -- is the only alternative to a grand coalition that would be sure to have a majority in the Bundestag, polls suggest. But Merkel is said to prefer a two-party coalition to a three-way alliance, making it only the second-best option.

While the liberals are currently playing hard to get, they’re the traditional preferred coalition partners for the CDU and their voters will expect them to join a Merkel government if they get the chance. The bigger stumbling block would be the Greens.

It would be the first time the Greens had joined a government at national level that wasn’t led by the SPD. After 12 years in opposition, the party leadership is open to breaking new ground -- and a Jamaica coalition was formed this year at state level in Schleswig-Holstein -- but working with the FDP and the CSU would be a big hurdle for many grassroots members, according to one leading Green.

Nonetheless, the Greens have set a low bar for joining a government. A Green demand for a deadline to end production of diesel cars, a key area of conflict with the FDP during the campaign, isn’t a red line in possible coalition talks, the senior Green said. And though the Greens favor a more forgiving German approach toward weaker euro-area economies and the liberals have a set of demands aimed at protecting German economic interests, Europe is not a priority for either party, so Merkel should be able to split the difference and continue her European agenda.

In an Ideal World...

There’s no majority in any of the polls right now for an alliance between the CDU/CSU and the Free Democrats. But if one emerges on election night, members of both parties will expect to resume a traditional partnership that ended in 2013 when the FDP lost all its seats in parliament.

CDU’s Michael Fuchs sees delays in building a coalition.

Source: Bloomberg

Nordea Markets analysts Holger Sandte and Jan von Gerich see a “significant chance that CDU/CSU and FDP will reach a majority of seats and so be able to form a two-party government.” The latest Allensbach poll released Tuesday put the parties on 47.5 percent, tantalizingly short of the level seen as needed for a majority. And last time round, the CDU outperformed the final polls by a couple of points.

The FDP wants to let countries leave the euro in an orderly way without quitting the EU, limit the firepower of the European Stability Mechanism and introduce automatic sanctions in case of excessive budget deficits. But the Nordea analysts and others say they expect the party to compromise on those demands.

“I am skeptical that the liberals will make Europe into their biggest sticking point in upcoming coalition talks as this would greatly diminish their likelihood of getting into a coalition with Angela Merkel,” said Jacob Funk Kirkegaard, a senior fellow with the Peterson Institute for International Economics in Washington.

Party members point in the same direction, saying an exit scenario for the euro zone wouldn’t be a red line in coalition negotiations. Instead, FDP leader Christian Lindner is calling for a "turnaround" policy for Germany’s economy with larger cuts in income taxes and a business-friendly approach one of his priorities.

Are New Elections Possible?

The SPD and the Greens say that they would put any coalition deals to a vote of their members, raising the risk of new elections, given the strong grassroots resistance in both parties to a pact with Merkel. But with at least two options available, “the chances for new elections can be pegged at 10-15 percent,” according to Kirkegaard.

Indeed, it’s the threat of new elections that may spur approval of a new coalition. None of the potential coalition partners will want to be blamed for bringing the country to a standstill and triggering a possible surge in support for the populist Alternative for Germany in a new vote.

Green co-leader Cem Oezdemir acknowledged as much when asked this week about the prospect of a deal his members might not much like, saying: “We are aware of our responsibilities.”

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