politics

Germany's Next Leader Could Make Or Break the Economy

INA FASSBENDER | AFP | Getty Images
  • With Chancellor Angela Merkel due to leave office after Germany's federal election on Sunday, the country's priorities could change dramatically.
  • Power is likely to be shared in a coalition government.
  • It's uncertain which parties will create or dominate a governing alliance.
Supporters of the German Social Democrats (SPD) party, attend at an election campaign rally on August 27, 2021 in Berlin, Germany.
Maja Hitij | Getty Images News | Getty Images
Supporters of the German Social Democrats (SPD) party, attend at an election campaign rally on August 27, 2021 in Berlin, Germany.

With Chancellor Angela Merkel due to leave office after Germany's federal election on Sunday, the country's priorities could change dramatically, particularly as power could soon be shared among newer — and more unpredictable — political forces.

It's practically certain that the next government will be a coalition, as is the current one, but what's far less certain is which parties will create or dominate a governing alliance.

What form the next coalition takes will undoubtedly have a big impact on Germany's economy, which is Europe's largest and arguably most important.

In 2019, almost a quarter of the EU's gross domestic product (24.7%) was generated by Germany, according to Eurostat, and so how the country is governed — at a time of transition in terms of global trade and consumer trends — matters.

The election is still wide open. An Insa poll Monday for the Bild newspaper found that while the left-leaning Social Democratic Party remains in the lead with 25% support, the ruling conservative Christian Democratic Union-Christian Social Union alliance has closed the gap with 22%. The Green Party trails at 15%.

A new coalition will have to be formed after the vote, and German economists say certain alliances could have "massive consequences" on the country's economy.

'Massive consequences'

Germany's respected Ifo Institute and newspaper Frankfurter Allgemeine Zeitung surveyed 153 economists at German universities, asking them how different coalition formations could affect Germany's economic growth, unemployment, public debt and income inequality.

For each of these measures, respondents were asked under which coalition the highest and lowest levels could be expected at the end of the next legislative period.

The survey results, published Tuesday, found that 83% of the German economists said the lowest economic growth rate would be the product of a so-called "Red/Red/Green" coalition of the SPD, the Left Party (Die Linke) and the Greens.

Such a coalition of leftist parties "would represent a sea change in policy direction, which would translate into a different economic policy with higher taxes and more government transfers," Ifo researcher Niklas Potrafke said of the survey results. "That would also have massive consequences for the real economy," he said.

A total of 77% of the economists said they expected that in addition to delivering the lowest economic growth, a "Red/Red/Green" coalition would lead to the highest unemployment rate and 86% believed it would have the highest national debt. However, 55% of the economists also believe that such a leftist alliance would achieve the greatest net reduction in income inequality.

The devil you know

Perhaps unsurprisingly, 44% of the economists believed that a coalition of the ruling CDU-CSU alliance and the pro-business FDP (a "Black/Yellow" coalition) would achieve the highest growth rate for Germany, although this grouping lacks a majority when it comes to current polls.

A "Black/Yellow" coalition would achieve the lowest unemployment rate, according to 43%, and the lowest public debt ratio, according to 73% of the economists.

This prosperity could come at a price to many with 70% of economists believing that such a coalition would lead to the highest net income inequality and 56% seeing it as leading to the highest carbon emissions of all the alliances.

In joint second place, 18% of the economists believed that the highest economic growth could come out of a coalition of the SPD, Greens, and FDP (widely called a "traffic light" coalition) and 18% felt the same about an alliance of the CDU-CSU, Greens, and FDP (known as a "Jamaica" coalition).

"Should either a so-called traffic light or a Jamaica coalition be formed, respondents believe the effects on growth, inequality, the public debt ratio, the unemployment rate, and carbon emissions would be more restrained," Potrafke said.

Polls wide open

Currently, there are a variety of possible coalition options, with most facing stumbling blocks to formation, meaning likely protracted negotiations after the election due to policy differences between the parties in areas ranging from economics to climate targets.

"Coalition formation might take some time," macro analysts from Teneo Intelligence said in a note Monday.

"Less than one week ahead of the 26 September federal election, the Social Democrats continue to lead in the polls. However, the Christian alliance appears to have recovered some ground. But even if the SPD wins, this does not necessarily mean that Finance Minister Olaf Scholz will become the next chancellor; CDU/CSU candidate Armin Laschet could still try to outmaneuver Scholz, for instance by trying to form an alternative government with the Greens and the center-right Liberals (the FDP)."

Journalists and party members watch on a screen from the press centre (L-R) Olaf Scholz, German Finance Minister, Vice-Chancellor and the Social Democrats (SPD) candidate for Chancellor and Armin Laschet, North Rhine-Westphalia's State Premier and the Christian Democratic Union (CDU) candidate for Chancellor as they attend an election TV debate in Berlin on September 12.
JOHN MACDOUGALL | AFP | Getty Images
Journalists and party members watch on a screen from the press centre (L-R) Olaf Scholz, German Finance Minister, Vice-Chancellor and the Social Democrats (SPD) candidate for Chancellor and Armin Laschet, North Rhine-Westphalia's State Premier and the Christian Democratic Union (CDU) candidate for Chancellor as they attend an election TV debate in Berlin on September 12.

The CDU-CSU is used to being in power, but that could all change after Sunday's vote; both the SPD and Greens' candidates for chancellor, Scholz and Annalena Baerbock, have suggested that neither of them has much appetite for a coalition with the CDU-CSU.

"I think that, after 16 years, many voters would like for the CDU to finally go into opposition again," Scholz said during the last TV debate between the main contenders for the chancellery on Sunday.

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