Monday, September 23, 2013

Historical night with Queen Mutti

The rather dull election campaign ended with a big bang and an election evening which made history. The German elections turned out to be unexpectedly nail-biting. As expected, it was already clear with the first exit polls at 6pm CET that Angela Merkel’s CDU would become the biggest party. In fact, Merkel reversed the outcomes of the past two elections, in which she did not manage to sustain the opinion poll results on Election Day, and led her party to its best result in 20 years. Moreover, last night offered a couple of other historical moments. Merkel’s junior coalition partner, the liberal FDP, missed the 5% threshold and will for the first time ever have no seat in parliament. At the same time, the anti-euro party, the Alternative for Germany, had an impressive performance, gaining 4.7% of all votes. At the beginning of the evening, an absolute majority for Angela Merkel seemed possible. With the official preliminary result, however, the next government can only be a grand coalition of CDU and SPD or CDU and Greens. The theoretically possible option of SPD, Greens and Linke has repeatedly been ruled out by both the SPD and Greens, and again last night. The other theoretical option, new elections, is also very unlikely in Germany. All of this means that the Germans will very likely get the coalition they have been looking for, at least according to latest surveys. This is a so-called CDU and SPD grand coalition. It is in fact the only realistically possible combination. Negotiations, however, will not be easy. The next government has a unique opportunity to use the current economic good times to ensure Germany’s leading position beyond current growth success. For a long while, Germany has benefited from the earlier reforms of the mid-2000s under former chancellor Schröder and, quite paradoxically, fiscal stimulus during the first part of the financial crisis under Merkel’s first government. Examples of this include car scrap schemes and subsidised short-term work schemes. In recent years, zealousness for reform has clearly slowed down. Therefore, it does not come as a real surprise that in OECD studies Germany often stands at the bottom of the list when it comes to newly implemented reforms. In our view, the biggest challenges for any new German government are to ensure that the economy remains the powerhouse of the Eurozone and can keep its leading position in world markets. To this end, the economic good times should be used to tackle important policy issues such as ageing and pension, investment and innovation, the final shift to renewable energies, and Europe. Germany is still amongst the fastest ageing economies of all European countries. Despite earlier reforms and increased retirement ages, the pension and health care systems are still under pressure. There is a lack of qualified workers in the health and elderly care sector and there have been recent discussions on civil servant pensions. Moreover, the new German government should not be complacent and should use the still-good economic times to invest in the future. Over the last decade, Germany has created a widening investment gap, both for public and private investments. Possible areas for investments are, for example, infrastructure (railways, highways), the expansion of broadband networks, and also energy transformation (including storage systems and smart grids). Energy transformation as such will of course also require significant attention. The shift from nuclear power to renewable energies is far from being finalised. In the short term, a possible coalition of CDU and SPD would clearly have to deal with campaign differences on whether to increase or cut taxes and what kind of minimum wage the country needs. Beyond these issues, however, a grand coalition would have a broad base in parliament, and, equally important, in the Upper House (Bundesrat) to bring forward necessary investment projects, further reforms of the pension system and next steps towards further Eurozone integration. For the Eurozone, a grand coalition would probably continue the current crisis management but with a softer hand. Eurobonds are unlikely but some new European investment initiatives and a soft push towards hidden burden sharing could be the result of a grand coalition. Even a kind of redemption fund, a Eurozone bank resolution fund and far-reaching integration could eventually enter the Eurozone’s centre stage with a grand coalition. All in all, a dull election campaign ended with a big bang and an election evening which made history. Germany has not become a political monarchy but Queen Mutti remains the undisputed political leader.

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