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Political risks

9 September 2013 By Olaf Storbeck

Germany’s parliamentary elections are expected to bring continuity and stability. In fact, they may well usher in a period of paralysis and uncertainty. German politics turning Italian is a possible scenario. Europe’s biggest economy might be stuck in protracted and difficult coalition negotiations – and it could be months before there is a working government in Berlin.

In the worst-case scenario, sustained political gridlock in Berlin will spook financial markets, delay important European reform projects like the banking union and may even reignite the euro crisis. While improbable, such a scenario is plausible. It could happen if – contrary to what most polls currently indicate – Angela Merkel’s conservative party CDU cannot form a coalition with the free-market FDP. This would require either the FDP to fail to garner the 5 percent of the national vote it needs to get into parliament, or the AfD, the new anti-euro party, to defy the odds and get representation in the Bundestag – making a parliamentary majority more difficult to build.

A grand coalition between Merkel’s CDU/CSU with the Social Democrats would then be the fallback option. That may look like a welcome change from a European perspective. A grand coalition would enjoy a vast parliamentary majority, be marginally more pro-European and might even be less keen on forcing austerity on the euro zone’s periphery. The last CDU/SPD coalition, which Merkel formed during her first term up to 2009, worked rather successfully.

But the SPD doesn’t want to team up with Merkel once again. It got squashed in the 2009 election, in its worst electoral performance since 1930. The Social Democrats will thus be inclined to make the CDU pay a high political price for a new coalition experiment. They might even ask for Merkel’s head – a no-no for the CDU. In such a situation, Merkel may start coalition negotiations with the Greens, which will create more uncertainty.

There are some reasons to dismiss a scenario in which the SPD plays hardball while Germany sinks into political gridlock. The Social Democrats have a habit of not playing petty politics when the situation gets serious. It then tends to subordinate party strategy to national necessity, accepting the raison d’état. Investors must hope it will stick to that tradition come Sept. 22.


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