On 24th September German voters will take to the polls to elect representatives to the 19th Bundestag. Polling stations will close at 1700BST, after which the first exit polls will be published. Once members have been elected, a Chancellor will then be appointed by an absolute majority; leading the way to form an actual government.
In order to get as representative system as possible, Germany uses a relatively complicated dual voting system which operates as follows. Voters are presented with two votes, the first of which sees the voter directly elect their desired candidate on a district level; these votes account for 299/598 seats in the Bundestag. Thereafter, the second vote is placed on the preferred party of the voter and from this members are allocated from pre-determined regional lists depending on their parties total share of the nationwide vote (parties must secure at least 5% of the vote at this stage to be able to send representatives to the Bundestag at this stage). Note, this part of the vote that corresponds to the percentage run on election night.
As an addition to the above, the German election system operates with an ‘overhang’ system. This system comes in to play when a party is allocated more seats via the first vote than they would have done based on the second party vote. The candidates who belong to parties which are ‘over-represented’ get to keep their seat as they have been directly, however, other parties who performed better in the second vote can appoint additional members to the Bundestag, thus rebalancing the representative nature of the system. It is this part of the system which led to 630 seats being allocated in the previous election and theoretically there being the possibility of as much as 800 members being elected to the Bundestag.
CANDIDATES & THEIR PARTIES
– Christian Democrats (CDU): Leader: Angela Merkel. Stance: centre-right. Policies: Reduction in taxation, focus on employment and public investment
– Social Democrats (SPD): Leader: Martin Schulz. Stance: centre-left. Policies: Focus on benefits for the working-class with taxation on the rich and investment in infrastructure and investment
– Left (Linke): Leader: Sahra Wagenknecht. Stance: left-wing. Policies: Rise in national minimum wage, anti-military.
– Green (Grüne): Leader: Katrin Göring-Eckardt and Cem Özdemir. Stance: centre-left . Policies: Focus on environment and social policies
– Free Democratic Party (FDP): Leader: Christian Linder. Stance: centre/centre-right. Policies: Lower taxation and deeper integration within the EU
– Alternative for Germany (AfD): Leader: Alice Weidel and Alexander Gauland. Stance: far-right . Policies: Firmly anti-immigration
Despite a strong start in polling data at the start of the year, the appeal of the SPD and their new leader Martin Schulz has continued to dissipate as shown above and as such the CDU are widely expected to be the most-represented party in the Bundestag. This has primarily been as a result of solid economic performance and a slight easing of national security concerns under Merkel’s leadership with the German electorate also seemingly more sympathetic towards Merkel’s open-door immigration policy. In terms of other notable trends from above, the FDP party could make a return to the Bundestag and subsequently form part of Merkel’s coalition plans (as discussed below)
German Chancellor Merkel is widely expected to win re-election with her CDU party. However, the margin of victory is not expected to be enough to avert having to form a coalition with another party. This presents the CDU with potentially three main options; either build another grand coalition with the SPD or the FDP or form a three-way coalition with the FDP and Green parties. Deutsche Bank highlight that the CDU may struggle to strike a deal with the SPD amid resistance within the party at joining another Merkel-coalition, however, many suggest that this is still the most likely course of action. Alternatively, SocGen suggest that the CDU party may try to strike a deal first with the FDP party alone if they are able to command the desired number of votes given the difficulties the CDU could face in dealing with the SPD and Green Party. However, polling data suggests that the two parties combined are unlikely to command a majority of the vote. Therefore, Merkel could attempt to rope the Green’s into striking a deal to form a three-way partnership but the amount of concessions the Green’s will likely require could make this a particularly difficult task (talks previously failed in 2013). Which ever path Merkel takes will likely be a long and difficult one. Note, Merkel has ruled out seeking talks with either the far-left or far-right.
In terms of a time-frame for forming a coalition, this can be a lengthy process with 2005 and 2013 discussions taking an average of 75.5 days and the quickest time taken to build a coalition being 30 days. Please click here for live betting odds on coalition outcomes.
HSBC suggest that a CDU/CSU-led government would most likely ensure a degree of policy continuation. The role of Finance Minister could be a source of bargaining between parties with it being a German tradition that the junior coalition partner gets first choice of a ministry. However, commentators expect the foreign office to be a great source of focus for opposition parties.
Focus for markets will potentially be based more on the ramifications for Europe than domestic issues given Germany operate under a shared-currency system. Merkel has been touted to push further for European integration (potential Eurozone budget, finance minister etc.) and although the SPD’s manifesto is relatively light on details for Europe, they’d be expected to follow suit with the CDU/CSU should they form a coalition. Conversely, should the CDU/CSU approach the FDP over a potential pact, then Merkel’s plans for deeper integration of the bloc could face some hurdles with the FDP being of the view that member states should operate with more individual responsibility and oppose joint liabilities. In the event of a CDU/CSU, FDP and green coalition, views on Europe would differ across the pact with the Greens very much pro-EU which could subsequently make coalition building process (as discussed above) even more difficult. Ultimately, HSBC conclude that Merkel could face some hurdles in European integration given the sacrifices that might have to be made in order to secure a steady government but this is unlikely to impact the long-term views of the party.
Even though Europe will most likely be more of a focus for the market, from a domestic perspective, tax reform is very much the key issue up for discussion. Given the surplus seen in the German general government budget, many of the main parties have pledged some form of tax relief with the largest tax cuts being proposed by the FDP party which would equate to around EUR 30bln (1% of GDP). Elsewhere, the CDU/CSU would likely put forward tax cuts of around half this amount; a proposal which the SPD would be expected to back in the event of another grand coalition. Finally, the Greens and the Left Party have more of a bias for increased government spending than tax reductions. However, any policy adjustments on this front aren’t expected to have too much of a long-term impact to the German economy and as such, these issues could take more for backseat for markets.
Ultimately, Germany’s ‘boring politics’ (Deutsche Bank’s words, not ours) is unlikely to cause too much traction in the market given the likelihood that Merkel will use her political expertise to form some sort of a coalition. As explained above, the coalition-building process could be one that drags on and the more it drags on and political uncertainty that forms, this could create some apprehension in investor sentiment. However, this is unlikely to cause too much long-term traction in the market. The issue of finance minister could generate some interest in the market, however, the base case is very much for Schaeuble to retain his post. As such, it would have to take a massive deviation from current polling to present markets with any noteworthy price action; such events could include a potential coalition between the SPD/FDP and Greens (i.e. removal of Merkel from power) but again the market is currently suggesting that there is little chance of this happening.