Will the “Grand Coalition” Survive?
On September 24th, the German public will elect a new government. The current government is a “Grand Coalition” between the CDU/CSU (Christian Democratic Union of Germany / Christian Social Union in Bavaria) and the SPD (Social Democratic Party of Germany) – the two main political parties. Following the defeat of far-right parties in the Australian, Dutch & French elections, markets have downplayed the risks linked to the upcoming German elections. Polling results have supported this view as support for the AFD, which peaked around 13%, has fallen to 7%. However, the latest polling results show that viable alternatives to the current “Grand Coalition” are building; Politbarometer indicates that the SPD have around 24% of the vote with support for the CDU at around 40%.
CDU’s Policies Move to the Right
Relative to their manifestos over recent years, the CDU’s proposed policies this year are more to the right of the political spectrum. For the first time, the party is advocating an increase in military expenditure from 1.2% of GDP to 2% of GDP by 2024. They’re also proposing increasing the police force by 15,000 and the military by 18,000. Furthermore, the CDU propose a gradual removal of the solidarity tax and an income tax cut worth EUR15bln. Referring to the immigration environment, which is a key topic in German politics, the party are in favour of more Turkey-EU style agreements with African countries which require immigrants to integrate and learn German.
SPD’s Policies Move to the Left
Get our Weekly Commitment of Traders Report: - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.
Get Our Free Metatrader 4 Indicators - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter
On the other hand, the proposed policies of the SPD have shifted to the left. The SPD advocate taxing income from labour and capital equally and also want to introduce an inheritance tax. The party also support increasing the police force by 15,000 officers but also supports the current humanitarian position on asylum seekers and the distribution of the refugees throughout the EU. Finally, the party want to introduce a new European economic governing body to manage European economic policy.
Policies of Alternative Policies
In terms of alternatives to these two parties, the key contenders’ manifestos are as follows:
The Die Linke party is focused on redistribution, social equity, and the right of migrants to remain in Germany. The party also wants to see equal pensions between East and West and Germany alongside raising the minimum wage to EUR12 from the current EUR8.84. In terms of fiscal policy, the party proposes a 5% tax on wealth over EUR1mln as well as increasing borrowing to fund investments in schools and the social safety net
The FDP are in favour of economically liberal policies such as increased labour market flexibility. Regarding immigration, the FDP wants to establish a clear distinction between refugees and economic migrants and an abolition of the minimum wage for migrants. Furthermore, they want to introduce a legal requirement to determine whether the job could be carried out by anyone else in the EU.
The AFD will be participating in the federal parliamentary elections for the first time. The party is sharply to the right and advocates leaving the Euro, closing Germany’s borders to unqualified migrants as well as pursuing an ethnic repopulation policy alongside protecting Germany against Islamic terrorism. Compared with the other parties, the AFD’s policies are the most extreme, and as such, the likelihood of the party entering a coalition is small.
Relative to previous elections the policy skew between the CDU and the SPD has become more polarised which decreases the likelihood of a coalition being renewed between the two. As such it is prudent to look at alternative scenarios which might arise.
A possible CDU-FDP Coalition
The popularity of the FDP has been increasing over recent weeks and other than the AFD, the FDP are the only party beside the CDU that take a tough stance on immigration. Following the large influx of Syrian refugees in 2015, immigration has become a hotly debated topic in German politics and is a popular topic in mainstream media. As such, support for the FDP and CDU could rise heading closer to the election date which raises the likelihood of a coalition between the two.
A coalition of these two parties would likely lead to less EU economic integration as well as wage deflation. The FDP supports abolishing the minimum wage for refugees to make sure that a wage floor doesn’t exclude them from gaining employment. If successful in implementing this law, it would likely keep wage pressures capped, despite a surge in the labour market, due to the number of refugees entering the market. The consequence of this would be a significant increase in output, which alongside moderate inflation would make the ECB’s goal of achieving 2% CPI in German and the broader euro area even more difficult. As such, a coalition of this nature could delay the ECB’s plan to steepen their removal of monetary policy and lead to downward pressure on the Euro.
About James Harte
James is an Orbex analyst and a well-known industry expert with over 7 years’ experience analysing currency markets. Beginning as a private retail trader, James developed a strong interest in understanding the fundamental aspect of the market before pursuing technical trading capabilities which he now uses to identify opportunities over a short-term horizon. Alongside his market experience, James is also IMC certified having achieved the qualification to help further his understanding not only of the markets but the industry as a whole. James has a strong interest in both fundamentals and technical, and uses both forms of analysis in generating and executing trade ideas, with trades generally lasting from a few hours to a few days.