ANALYSIS: What's next for Germany?

THE RESULT:

• German election preliminary final result is SPD at 25.7%, CDU/CSU at 24.1%, Greens at 14.8%, FDP at 11.5%, AfD at 10.3% and Left at 4.9%, while the German Federal Returning Officer announced the seat distribution from the preliminary results which were SPD at 206 seats, CDU/CSU at 196. Greens at 118, FDP at 92, AfD at 83, Left at 39 and SSW at 1.

WHAT HAPPENS NEXT?

• Given that no single party has attained a simple majority, the next government will need to be formed via a coalition-building process. Note, the coalition-building process can play out over the course of several months. Following the September 2017 election, talks between the "Jamaica" coalition failed to result in forming a government. Thereafter, coalition discussions between the CDU/CSU and SPD took place in January 2018 before the grand coalition was renewed on 12th March 2018, some six months after the 2017 election outcome.


• Note, voters did not directly cast a ballot for the Chancellor; this part of the electoral process is determined by parliament. More specifically, as the coalition process plays out, typically, the leader of the largest party within the coalition (usually the head of the overall largest party) will be presented by the President to parliament, who will then vote to appoint or reject them via a secret ballot.

POTENTIAL COALITION OPTIONS

• 
  'Jamaica': Parties: CDU/CSU, The Greens and FDP.


• 
  'Traffic-light': Parties: SPD, Greens and FDP.


• 
  'Grand Coalition' Parties: CDU/CSU and SPD.
  

WHAT IS THE MOST REALISTIC OUTCOME?

• Of the three potential coalition options, the Grand Coalition is seen as the least likely given that the CDU/CSU will be unlikely to be willing to play the role of the junior partner. As such, the Greens and FDP are now seen as kingmakers in the coalition process. Accordingly, both the FDP and Greens have suggested that they might hold their own discussions with each other first before holding talks with either of the two larger parties.


• As it stands, it is unclear which party they will have a preference for. However, given the victory of the SPD and the more amicable performance in TV debates between the SPD and Greens, a “Traffic Light” coalition is seen by some as more likely (Danske Bank applies a 60% probability to such an outcome).


• That said, the preferences of the FDP and Greens might be dictated by how much they feel they could get in the way of concessions and positions in government from the SPD or CDU/CSU. Ahead of the election, there had been suggestions that the FDP could look to push for Lindner to be appointed as Foreign Minister and Greens could look for Baerbock to take the Foreign Ministry.


• Asides from positional appointments, parties will also need to overcome ideological differences with the FDP and Greens holding opposing views on matters such as the debt brake and EU Recovery Fund with the FDP taking a more restrictive stance (see our preview for further details).


• When it comes to economic policies, it's possible that the FDP might see themselves as more aligned with the CDU/CSU with both parties of the view for example, that the EU Recovery Fund should be seen as a “one-off”. However, the Greens will likely struggle to align their views with that of the CDU/CSU and FDP in such a set-up.


• Many compromises will need to be made throughout the coalition-building process and as such a great deal of uncertainty remains about the process. However, SPD’s Scholz as head of the largest party has stated a clear intention to work with the Greens and FDP and as such this will form the markets base-case expectation.

MARKET REACTION SO FAR:

• Given the uncertainty of the outcome, EUR saw little follow-through from the election. For the EUR, it remains to be seen whether the eventual coalition result will have much sway on EUR on the basis that the process will take several months and could coincide with the crunch ECB December policy meeting which is expected to shed some light on how the Bank intends to wind down PEPP and most likely bolster APP in the coming months.


• Elsewhere, given the elimination of the tail-risk of the Left party entering government, Bunds were seen higher at the European open before trimming gains alongside a pick-up in global equities. The DAX (+1%) is trading on a firmer footing but broadly in-line with regional peers.

27 Sep 2021 - 11:26- EquitiesEU Research- Source: Newsquawk