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Berenberg Macro Views
Economics
German elections: the morning after
KEY RESULTS
• A strong result for Merkel’s CDU/CSU (41.5%, see chart)
• Merkel is highly likely to remain chancellor
• But her current coalition partner, FDP, has dropped out of
parliament with 4.8% of the vote, just below the 5% threshold
• The anti-euro party AfD gets 4.7% and fails make it into parliament –
a relief for Europe
• The SPD, with the ultra-left and the Greens, would have a slight
majority of seats, but the risk that SPD could team up with them and
oust Merkel looks small.
Most Germans want a Merkel-led grand coalition according to opinion
polls. They will almost certainly have their wish granted.
The impact on policy will be small, with hardly any change at European
level and a modest tilt towards a centre-left agenda at home. We look for
a minute softening of the German stance towards euro crisis countries. At
home, the likely CDU/CSU-SPD alliance will mean modestly-higher
income taxes, further minimum wages and some extra government
spending on infrastructure and the power grid. Despite potential
speculation that a grand coalition may end early, we expect it to last for
Merkel’s full third term.
Linke, 8.6
Greens, 8.4
CDU/CSU,
41.5
Key Macro Views reports
Understanding Germany
– a last golden decade
ahead
13 October 2010
Euro crisis: The role of
the ECB
29 July 2011
Saving the euro: The case
for an ECB yield cap
26 June 2012
Tough love: the true
nature of the euro crisis
20 August 2012
Euro Plus Monitor:
Spring 2013 Update
7 March 2013
Mind the court: the top
event risk in Europe
31 May 2013
German election preview:
little impact on Europe
16 July 2013
What Germany’s parties
are up to
17 July 2013
SPD, 25.7
Because of the red-green majority in the upper house (Bundesrat),
Germany has been governed by a de facto informal coalition of all
mainstream parties anyway in the last few years. A formal grand coalition
in Berlin will have a much stronger position than Merkel’s current
government, but not a majority in the upper house of parliament, the
chamber of state governments.
We consider it unlikely that the SPD will now team up with the ultra-left.
That would be unpopular and highly contentious within the SPD. As
SPD-Greens and the ultra-left would only have a marginal majority of
seats, the risk that SPD defectors could refuse to vote such a government
into power would be huge.
In this note, we analyse the election result and look at future challenges,
including bail-outs and banking union at European level.
German election preview:
the other lady
27 August 2013
German elections: a lastminute
wobble
18 September 2013
23 September 2013
Dr Holger Schmieding
Chief Economist
+44 20 3207 7889
holger.schmieding@berenberg.com
Dr Christian Schulz
Senior Economist
+44 20 3207 7878
christian.schulz@berenberg.com
1

Berenberg Macro Views
Economics
Grand coalition most likely, no Bundesrat majority
Merkel’s CDU/CSU is the great winner of Sunday’s elections, gaining 7.7
percentage points compared to 2009, mostly at the expense of the junior
coalition partner FDP (see Chart 1). The CDU/CSU even came close to an
outright majority, winning 311 of 630 seats, just six short of the majority.
The SPD also recovered a little from the losses of 2009 and obtained 192
seats. The Greens (63 seats) and Left Party (64 seats) sustained significant
losses, and the Pirates proved to be a temporary phenomenon.
Against the weak trend for small parties, the anti-euro AfD achieved 4.7%
of the vote from scratch, but failed to enter the Bundestag, which made
some headlines. Relative to the strength of maverick parties elsewhere
(UKIP in the UK, Front National in France, Wilders in the Netherlands,
Strache/Stronach in Austria), the 4.7% for German AfD is quite contained
anyway. This shows that Germany’s pro-euro consensus is pretty solid.
Large parties win, small parties
lose. Exception: AfD
Anti-euro party performs well, but
pro-European consensus stable
NO MAJORITY IN THE UPPER HOUSE
A grand coalition or an unlikely alliance between CDU/CSU and Greens
may have a healthy majority in the Bundestag, but in the upper house, the
Bundesrat, where Germany’s 16 states are represented, neither would have
a majority. Only the possible left alliance of SPD, Greens and Linke have a
majority there. Since the Bundesrat is involved in almost all decisions
involving serious money, the new government will continue to have to
strike deals with that majority.
In the separate state election in Hesse on Sunday, the CDU-FDP state
government lost its majority, probably paving the way for a grand coalition
at state level. But this remains unclear. As a small consolation to the FDP,
the liberals made it into the Hesse state parliament, with 5.0%. But even if
Hesse turns to a grand coalition as well, this combination would still only
have 29 out of 69 votes in the upper house (see Chart 2), and this will not
change soon. The next scheduled state elections are:
- Saxony (CDU/FDP, summer 2014)
- Thuringia (CDU/SPD, summer 2014)
- Brandenburg (SPD/Linke), summer 2014)
- Hamburg (SPD/Greens, spring 2015)
- Bremen (SPD/Greens, spring 2015)
This means that, even in a best case scenario whereby grand coalitions are
formed at each of these elections, summer 2014 would be the earliest point
at which a Grand coalition could obtain a majority in the upper house.
However, a grand coalition should find it relatively easy to bring the Greens
onside, with which it would rule all but two states (Saxony and
Brandenburg). That is a far more comfortable position than Merkel’s
outgoing coalition enjoyed.
Even grand coalition without
outright majority in Bundesrat
Hesse may turn to grand coalition
as well
No major elections in sight
Greens likely to support grand
coalition
2

Berenberg Macro Views
Economics
Chart 1: Winners and losers
Chart 2: No majority in the upper house?
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
Rhineland
Palatinate, 4
Lower Saxony,
6
North-Rhine
Westphalia, 6
Bremen, 3
Hamburg, 3
Brandenburg, 4 Saxony, 4
Hesse, 5
Saar, 3
Bavaria, 6
Saxony Anhalt,
4
Thuringia, 4
Changes in voting shares from 2009 elections, percentage points. Source:
German public television
Schleswig-
Holstein, 4
Baden-
Wuerttemberg,
6
Berlin, 4
Mecklenburg
West
Pomerania, 3
Seats in the upper house of parliament (Bundesrat) by coalition. SPD (red), Greens
(green), CDU/CSU (black), FDP (yellow), Linke (violet), 12m sum. Hess before
last night’s elections. Source: Bundesrat
3

Berenberg Macro Views
Economics
What would a grand coalition do?
Merkel’s CDU/CSU stands for virtually unchanged policies, while the SPD
endorses Merkel’s euro policies but wants a partial reversal of the 2004
reforms that had turned Germany into Europe’s growth engine. We expect
the two sides to agree on:
- virtually unchanged euro policies
- no euro bonds or other serious mutualisation of debt
- some discussion over a debt redemption fund, possibly to be relegated
to a committee (which would likely report back that such a fund would
be unconstitutional in Germany)
- a minor fiscal stimulus through more spending on infrastructure and
the power grid
- a modest hike in top marginal income taxes and possibly capital gains
taxes
- more minimum wages for ever more sectors, but not quite a uniform
national minimum wage
- a gradual reduction in subsidies for solar and wind energy.
Slightly more centre-left agenda at
home
Table 1 gives an overview of the campaign platforms of the major parties;
more can be found in our note What Germany’s parties are up to of 17 July
2013.
In preparation of coalition talks, which could commence early next week,
the SPD will call a party convention at which it will discuss policies and
probably also personnel. Merkel is also likely to have preliminary talks with
the Green party, although the policy differences, personal animosities and
the lack of any majority in the upper house of parliament make such an
alliance extremely unlikely. Such talks may prove to be more of a bargaining
chip in Merkel’s negotiations with the SPD. Forming a new coalition
government usually takes 1-2 months in Germany, depending on how
difficult the negotiations are and how many coalition variants there are. The
grand coalition in 2005 took two months to form, so it could take a similar
amount of time this year.
Besides the actual policies the coalition partners will eventually agree,
personnel decisions will be very important. The position of the Finance
Minister will grab particular attention in the Eurozone, as the current
Finance Minister, Schaeuble, a political heavy-weight and respected pro-
European, has played a key role in the management of the euro crisis so far.
In the last grand coalition, Peer Steinbrueck of the SPD was finance
minister, but a weakened SPD may not obtain the post this time around.
The Bavarian sister party of Merkel’s CDU, the CSU, which performed
strongly in both the national and the regional elections last week, may also
claim the post.
Policy overview in Table 1
Negotiations to be prepared this
week
Finance minister post up for grabs?
4

Berenberg Macro Views
Economics
The challenges: budget, banking union, bail-outs
On the domestic front, the 2014 federal budget needs to be agreed and
submitted to the EU Commission by 15 October, before the Bundestag can
pass it by the end of the year.
It is on the European level that the new government needs to hit the
ground running. At the Eurozone Finance Minister meeting on 14
October, the agreement with the European Parliament (EP) on the ECB’s
role as banking super visor (Single Supervisory Mechanism, SSM) needs to
be finalised. The much more controversial Directive on bank resolution –
especially the questions of the legal basis, the resolution authority and its
financing – need to be addressed, so that the 24 October summit can make
a proposal to the EP. The time pressure results from the fact that the EP
faces elections on 22 May 2014. Ideally, the parliament could discuss and
pass the legislation this year, although that seems extremely ambitious.
Ireland’s bail-out programme expires at the end of this year. On 15
January, the country has to redeem a government bond of €6.6bn, probably
mostly held by the ECB. While that should be possible for Ireland even
without support from the Eurozone, extending an enhanced conditionality
credit line (ECCL) of the rescue fund ESM to the country would help to
smooth the transition.
Portugal and Greece are currently going through reviews by the troika of
EU, IMF and ECB. Preliminary results may be discussed at the 14 October
Eurozone Finance Minister meeting as well, and both may be less flattering
than recently. The junior partner in the Portuguese coalition has demanded
an easing of austerity. The Portuguese programme expires in mid 2014, and
the decision as to whether the country needs a second full bail-out or just a
flexible credit line is likely to depend on the outcome of the negotiations.
Greece may be even more complicated. Being on track to achieve a
primary surplus at the end of the year, the country has delivered on the
conditions set last November to qualify for further debt relief. But the IMF
is also insisting on relief of up to €11bn to allow Greece to make faster
progress towards hitting the debt ratio of 120% by 2020. On top of that, it
is pressuring the Eurozone to commit ESM loans of €11bn to fund Greece
through 2015 as well. Some reward for Greece’s efforts is likely to find
support in Germany’s new political constellation, although any new
government will also keep the pressure on Greece to continue the reform
process and catch up delays, for example in the privatisation process.
The SPD has been sympathetic to the Eurozone growth pact proposed by
France last year. More investment to spur growth both in Germany and the
Eurozone are likely to be at the top of their agenda. However, even the
Social Democrats are unlikely to be much more generous when it comes to
funding.
The tough love approach in the Eurozone – core Europe plus ECB help,
Euro-periphery accepts the conditions attached – has survived changes of
government in all peripheral countries. It will also survive the change in the
composition of government in Germany. Give or take a few details,
2014 budget first test at home
Banking union on the agenda in 3
weeks already
Ireland could get a credit line to
smooth bail-out exit
Portugal between Irish-style credit
line and second bail-out
Carrot and stick for Greece
A new “growth pact” for Europe?
Tough love remains the Eurozone
script
6

Berenberg Macro Views
Economics
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