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Livesquawk - German Election Too Close To Call
German Election Too Close To Call
The departure of "Mutti" has German politics in a tizzy.

- Multiple coalitions possible

- Merkel’s conservatives set for a trouncing

- Centre-left Social Democrats could lead next government

- First projections expected Sunday at 16:00 GMT


By Eric Culp, European Editor

LiveSquawk News


23 August 2021 | 09:15 GMT


FRANKFURT – As if the past 18 months haven’t been eventful enough, balloting in Germany’s federal election ends Sunday, and right now it looks like a statistical dead heat for the two lead parties with a quarter of the electorate reportedly still undecided.


Many of the more than 60 mln Germans eligible to vote will trek to polling centres Sunday to select a replacement for outgoing Chancellor Angela Merkel, and the country could set a record for mail-in ballots, according to local media. First projections usually come at 16:00 GMT, the deadline for voting across the nation, but forming the next administration in Berlin is expected to be a lengthy task. UBS said, “It will likely take weeks, possibly months, before coalition talks are complete and the new government takes office.”


The centre-left Social Democrats (SPD) are in the lead with 25% of voter support, the party’s peak for this election cycle, according to a Forsa poll released Tuesday. But their partner in Germany’s current and oft-fractious grand coalition, the centre-right alliance of Merkel’s Christian Democrats and Bavaria’s Christian Socialists known as the “Union”, has been clawing back ground. Despite having the worst-polling chancellor candidate from a major party, the Union scored 22% in the Forsa survey, a rise of one percentage point in a fortnight. Additionally, the poll has margin of error of 2.5 points on either side, so the election in Europe’s largest economy looked like a virtual toss-up just four days before voting ends. One point of note: the Union’s latest polling result was more than 10 points below its showing in the last federal election in 2017.


The SPD must be apoplectic at the sight of any Union resurgence, however slight: after winning the most votes in the past four federal elections, the popularity of Merkel’s center-right alliance dipped below 20% earlier this month. Much of the disapproval for the Union can be laid at the feet of Armin Laschet, leader of the Christian Democrats and premier of the state of North Rhine-Westphalia. With his party already losing ground, he laughed on camera during a tour of an area ravaged by recent floods, an incident that further eroded his already middling support. And in a country where people’s monikers often still mean things, the first syllable of his surname translates to “slack” and “lackadaisical”.


Polling says the most popular replacement for Merkel is the SPD’s Olaf Scholz, the country’s vice-chancellor and finance minister. But he has seen his party’s lead slip as of late, and his ministry was searched last week by authorities investigating the German customs service’s Financial Intelligence Unit, which is bad timing for anyone running for office. The SPD’s number in the polls is nearly five points above how it performed in 2017.


Annalena Baerbock, chancellor candidate for the Greens, initially looked like the media darling, and at one point her ecological party soared to 28% in one poll. But it was a short-lived honeymoon with the electorate, and accusations of plagiarism in July tarnished her image. This week, the Forsa poll had her party at 17%, which is nearly eight points higher than the voting result for the Greens four years ago.


Look at all the pretty colours

The shifts in Germany’s political power dynamic since 2017 make predicting the next Berlin government about as easy surfing the Eisbach stream in Munich’s landlocked English Garten (yeah, that’s a thing) while juggling machetes. And because the parties here are colour-coded for voter (and journo) pleasure and shorthand, terms like “Traffic Light”, “Jamacia”, and “Kenya” are being used to describe possible coalitions, with plenty of vivid charts to entertain.


Two coalitions are oft-mentioned as viable among observers: the Traffic Light with the SPD, the Greens, and the pro-business Free Democrats; and the Red-Green-Red with the SPD, the Greens, and the Left Party (Die Linke), the latter of which is considered by many Germans to be a communist party because that’s who started it.


The Traffic Light constellation currently appears to have enough votes to form a government, but the Free Democrats are likely to clash with both partners over economics, which could end such a partnership before it ever gets a chance.


As for the Red-Green-Red option, prospective members are still a couple collective points short of a majority, according to polls, but direct mandates might give this triumvirate the number of seats needed to take charge thanks to Germany’s complicated parliamentary voting system.


“Despite scaremongering about the risks of involving the Left Party in a coalition, the German electorate shows no signs of turning against such an outcome,” Anatoli Annenkov from SocGen said in a note. “Clearly the fatigue with the ruling CDU/CSU [Union] is very strong, resulting in a continued lead for SPD leader Scholz and the possibility of a Red-Red-Green coalition, with climate change and pensions high on voters' agenda.


“The coalition outlook gets more complicated if there is no alternative on the left-side with SPD being the largest party,” Annekov warned. In this case, he said some form of the status quo would win out, with most likely mix being a Kenya coalition – black, red, and green like the country’s flag – or possibly a grand coalition, if the Union “negotiates well and convinces the SPD that the Greens are not needed for effective climate change policies”.



It's the economy, stupid

Germany’s Ifo institute, the economic thinktank, has already predicted who will best serve German growth over the next four years, which of course presumes the next government survives that long. Strangely enough, it sees the worst performance coming from the current two-hander of Merkel’s Union and Scholz’s SPD, but with the latter in charge. (See chart.)


Barring a massive, unexpected landslide, analysts see little change in the markets in the aftermath of the elections, especially since it could take months for a new government to assume office. JPMorgan, for example, said the results are unlikely to derail EU equities.


As for the foreign exchange market, TD Securities said: “We view the German elections in the context of our improving EUR growth signals, especially as the EUR runs a discount on our trading dashboard. While the event itself won't be a game-changer, a growth-friendly mix of the SPD/Greens would likely reinforce that the EUR has started to carve out a bottom.”


UBS said the watchword is patience. “For investors, we believe key areas to focus on are climate change, digitalisation, fiscal policy and appetite for further EU integration. Most of the major political parties have pledged to deliver more in these areas, particularly the first two. However, the full extent of any changes will not be known until collation negotiations are complete.”