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German election preview

02 September 2021 Jan Gerhard

Recent shifts in voting intention reflected in polls from August indicate a heightened probability that Germany will be governed for the first time at the national level by a tripartite government in the next administrative term.

Three candidates have a viable chance to become chancellor: Armin Laschet, the joint candidate of Merkel's centre-right Christian Democratic Union (Christlich Demokratische Union Deutschlands: CDU) and its Bavarian regional affiliate Christian Social Union (Christlich-Soziale Union: CSU), Olaf Scholz, running for the centre-left Social Democratic Party (Sozialdemokratische Partei Deutschlands: SPD), and Annalena Baerbock, nominated by the Greens (Die Grünen). A coalition between CDU/CSU and the Green Party has since 2020 been considered the most likely post-election arrangement, but a number of campaign missteps by both Laschet and Baerbock have recently caused a decrease in projected combined electoral support. This in turn increases the probability of a three-party government.

Given the multitude of possible coalition options, forming the next administration is likely to take at least several months.

In addition to the three frontrunners - CDU/CSU, SPD, and the Greens - the smaller Free Democratic Party (Freie Demokratische Partei: FDP) will be the fourth party with chances to be part of the next government. Six parties are likely to cross the 5% threshold required to enter parliament, with the other two being the Left Party (Die Linke) and the right-wing Alternative for Germany (Alternative für Deutschland: AfD). However, teaming up with the AfD has been ruled out by all other parties, and a coalition that includes the Left Party would only remotely be feasible with SPD and the Greens. Even if negotiations between the relevant parties continue until early 2022, it is unlikely that Germany's business environment would deteriorate or that the envisaged coronavirus disease 2019 (COVID-19) recovery plan would be materially damaged.

A key priority for all feasible coalitions in the next administrative term will be tighter environmental regulation to strengthen the fight against climate change and the related transition to a greener economy.

This includes advancing energy policies that phase out carbon-intensive industries while replacing coal and other energy sources with renewables and different sustainable options. Further focus areas in the next administrative term will be large-scale investments in digital infrastructure and transport, not least to boost productivity; the adjustment of labor-market and social policies to reflect globalization, the modernization of work processes, and the discontinuation of certain jobs; public health and education reforms; and continuous tasks such as strengthening the economy and ensuring high levels of internal and external security.

There is a heightened risk for all possible coalition governments that the effective implementation of preferred policies will be hampered by restraints related to the COVID-19 virus.

The next administration will have to address the task of managing the economic and social recovery from the pandemic, which is likely to remain a core policy challenge during the upcoming four-year term. Key hurdles thereunder include the return to balanced public finances and the need to rearrange fiscal policies to reflect the pandemic's cyclical and structural consequences. Other probable challenges are likely to comprise new migration flows into Europe for instance those originating from Afghanistan, Germany's general reluctance to expand commitments to international military operations, and fighting both far-right and jihadist terrorism.

Posted 02 September 2021 by Jan Gerhard, Senior Analyst Country Risk Europe, IHS Markit

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