Bundestag

Coalition poker after German parliamentary election

The election for the 20th Bundestag has produced a close result. A day after the election and it is not yet clear which parties will form the next German government and who will be in charge. Can we draw any early conclusions for the capital markets at this stage? Dr Jörg Zeuner, Chief Economist at Union Investment, puts forward his view.

Source: Union Investment, as at 27 September 2021.

The election for the 20th Bundestag has produced a close result. According to the provisional official results, the Social Democrats (SPD) and Christian Democrats (CDU/CSU) are virtually level pegging. While the SPD has made strong gains, the CDU/CSU recorded their worst result of the post-war era. The Greens also performed a lot better and will be the third-largest party in the Bundestag, followed by the slightly resurgent Free Democrats (FDP). Although the left-wing party (The Left) will continue to be represented in the parliament, it lost many votes.

  • Small lead for SPD

    Small lead for SPD
    Source: The Federal Returning Officer, as at 27 September 2021. * 2021 result above, 2017 result below.
  • Source: The Federal Returning Officer, as at 27 September 2021.

Various coalitions are possible

Against this backdrop, the future composition and leadership of the next German government remain unclear. As the make-up of the parliament has changed, several coalition combinations are possible. The likely options, however, are a three-way coalition of one of the mainstream parties – SPD or CDU/CSU – with the Greens and FDP. A ‘traffic light’ coalition (SPD, FDP, Greens) or ‘Jamaica’ coalition (CDU/CSU, FDP, Greens) are therefore the most probable alternatives at present. Although the parties of the current grand coalition have a parliamentary majority, this variant currently seems highly unlikely and is viewed as improbable by both parties. Moreover, there is no parliamentary majority for a red-green-red government.

Three realistic options for forming a coalition

Three realistic options for forming a coalition
Sources: The Federal Returning Officer, Union Investment, as at 27 September 2021.

The election itself provides little clarity from a capital markets perspective

Dr Jörg Zeuner, Chief Economist at Union Investment, does not believe that the election itself brings much clarity: “The economic policy considerations meant that red-green-red was a difficult risk to predict for many investors. This option is now off the table.” According to Dr Zeuner, however, all the other crucial questions from a capital markets perspective are still to be answered. “The coalition poker is just beginning. The sooner that practicable solutions for urgent issues relating to the economy and markets emerge, the faster that the markets can return to day-to-day business. We expect the exploratory talks and coalition negotiations to be a difficult and drawn-out process. In the meantime, the capital markets may see repeated bouts of heightened volatility,” he explains. Dr Zeuner believes that matters with a direct impact on capital markets – such as the debt brake, fiscal policy and European policy – could be potential sticking points in the negotiations.

There is, however, already one positive message for the stock markets, according to Dr Zeuner. “Germany will continue to be led by a pro-Europe government going forward. That is good news for European investments, such as periphery bonds and the euro.” He also anticipates that climate change will be high on the political agenda. “Decarbonisation is one of the dominant issues of the 2020s. Efforts to combat climate change will therefore be a focus for the next German government, regardless of who is at the helm. This will not be without consequences for sustainable investment,” says Dr Zeuner.

 

As at: 27 September 2021.