- A deal on Germany's next governing coalition is set to be finalized and announced on Wednesday.
- Government formation comes almost two months after the country's federal election in September.
- Coalition talks have been taking place between the center-left Social Democratic Party, the Green Party and pro-business Free Democratic Party (FDP).
Germany's next government is about to take another big step toward completion, with a coalition deal set to be announced on Wednesday afternoon.
The deal is expected to be announced at 3 p.m. local time (9:00 a.m. ET) after a final round of talks between the center-left Social Democratic Party, the Green Party and pro-business Free Democratic Party.
The coalition agreement comes after almost two months of talks following the country's federal election in September as no one party gained a big enough share of the votes to govern alone.
Olaf Scholz, the SPD's candidate, is set to be Germany's next chancellor while Christian Lindner, the head of the FDP, is set to be the next finance minister, according to two people close to the coalition discussions who wanted to remain anonymous due to the sensitive nature of the talks.
The Green Party's co-leaders, Annalena Baerbock and Robert Habeck, are poised to take on the roles of foreign minister and economy minister, respectively, the same sources said.
The alliance has been described as a "traffic light" coalition in reference to the parties' traditional colors.
The parties have vowed to modernize Germany, which is Europe's largest economy, with a priority placed on the transformation of the economy into a greener, digitalized one, as well as infrastructure investment.
German businesses are anxious to see what this transformation means for them in reality, in terms of energy prices and business costs.
Carsten Brzeski, global head of Macro at ING, told CNBC Wednesday that the big question was "what will the energy transition look like for Germany?"
"In the [election] campaigns we heard 'this doesn't cost anything,' but I don't think that is true: The energy transition will mean higher energy prices one way or the other, and for German companies who are already facing one of the highest energy costs of all European countries, this is bad news. I hope the plan, and I hope to see this in the coalition agreement, [will show] how the next government will orchestrate this energy transition."
As for the policies the coalition will adopt, Robin Arens, associate at Bernstein, told CNBC on Tuesday that the devil would be in the detail. Given the different starting points for the parties in the coalition, compromise will be needed, he said.
For example, the expectation that Christian Lindner will be Germany's next finance minister means that there might have to be compromises in terms of the ambitious spending plans envisaged by the Greens and SPD aimed at transforming Germany's economy into a greener and digitalized one.
"Lindner will have to make compromises, the Liberals will have to make compromises, on how to finance the green revolution or the rebuilding of the German economy. We will see how this will unfold. It also depends on the developments around Covid and any financial aid the government has to put in place this winter. So there's a pretty complex situation at the moment."
Germany's long-standing chancellor, Angela Merkel, is stepping down from the role after 16 years in office, marking a significant change in Germany's political landscape.
With Scholz on the cusp of taking over the chancellery, Merkel presided over her last cabinet meeting on Wednesday and bid her colleagues farewell. She was presented with a tree to plant in her garden, according to Reuters.
Scholz has been the country's finance minister in Merkel's government and Germany's vice chancellor.
Merkel does not leave her party, the Christian Democratic Union (CDU) and its sister party, the Christian Social Union, in a good place with the conservative alliance largely left out in the cold during coalition talks following the election.
The CDU and CSU have been dominant in German coalitions for decades but will now find themselves in opposition after the alliance's candidate for chancellor, Armin Laschet, failed to inspire voters. Laschet stepped down as state premier of North Rhine-Westphalia and is expected to be replaced as head of the CDU.