German Elections: Grand Coalition Increasingly Likely

Published on September 17, 2013

The single most important takeaway from Sunday’s state elections in Bavaria was not how the Christian Social Union won an absolute majority of 101 out of the 180 seats in the state parliament, or how badly the Social Democrats did, or even that the Free Democrats failed to clear the 5% threshold to win representation in Bavaria.

Instead, it was that the Bavarian results removed any pretense by the two main parties, the Christian Social Democrats and the SPD, that their path to power lies with their coalition partners, be it the FDP for the CDU/CSU, or the Green Party for the SPD. Both are now openly scrambling in the final week to increase their own party votes, essentially at the expense of their coalition partners, with the single purpose of maximizing their leverage in the post-election negotiations that will begin nearly as soon as the elections results are tallied up.

*** We believe the highest probability outcome this Sunday will in fact be a Merkel-led Grand Coalition between the CDU/CSU and the SPD, rather than a continuation of the current coalition. Regardless of what she says on the campaign trail about a return to power with the FDP, Merkel from what we understand is almost certain to steer the negotiations towards a Grand Coalition she has long sought if she can, and that, in turn, will depend on whether she can woo Germany’s so-called “Merkel Democrats,” the 14% or so of SPD voters who are leaning to Merkel’s CDU as she slowly pulls the CDU to the center of German politics. ***

*** For Merkel, a more stable and sizable majority in the Bundestag as well as the ability to manage the SPD-controlled Bundesrat through a Grand Coalition would enable her to pursue a more centrist social and European policy agenda in her third term. And, in turn if she gets her way, it could also underpin a stronger Euro, higher German asset prices, and a renewed push — down the road — for a stronger European Union. A more stimulative domestic policy and friendly Euro policy would also benefit the rest of Europe, including peripheral markets, at the expense of German bunds. For the markets, though, coalition negotiations could mean several days, if not many weeks, of political uncertainty. ***

*** There are two potential road blocks to Merkel’s Grand Coalition aspirations. The first is if enough tactical “second” CDU votes go to the FDP that it lifts the FDP well above the 5% threshold — which it is highly likely to break in any case — at the expense of the CDU, undercutting Merkel’s options and pushing her back to the current CDU/CSU-FDP coalition government. An equal challenge lies within a badly fracturing SPD unable to rally to a junior partner role again, especially after such a stunningly inept political campaign by its middle-finger prone candidate Peer Steinbrueck. ***

There is almost no chance of a SPD-Green Party government, and even less so for a SPD/Green coalition with die Linke, the far left party, at least for now, even though their combined results would exceed that of the CDU/CSU-FDP; likewise, there is almost no chance for the FDP to jump ship to the SPD/Greens, and while it remains an intriguing prospect, the chances are nearly as low for a CDU/CSU coalition with the Greens. The Alternative for Deutschland vote is only relevant in that the better it does, the more it drives the coalition talks towards a Grand Coalition.

Positioning for Coalition Negotiations

In many ways, the single most telling indication of the likely outcome on Sunday can be gleaned not in trolling through the most recent polling data or spinning what the Sunday Bavarian elections portend, but in a quiet moment on the last day of a special plenary session of the Bundestag in early September. On that day, Merkel crossed the floor from her government bench to sit down briefly with Franz Muentefering, a retiring senior Social Democrat who served as her Vice-Chancellor in the first Merkel-led CDU-SPD Grand Coalition in 2005-2007.

She could have easily said her farewell in private, but in going out of her way to be seen chatting warmly with Muentefering on the television news that night, Merkel was sending a potent and unmistakable signal to the electorate, a majority of whom she knows perfectly well favor a Grand Coalition, that she would indeed work with the opposition or whichever partner would be in the best interests of Germany.

Her gesture especially stood in stark contrast to the stumbling reply by the SPD’s Steinbrueck in their recent debate when he said he could not imagine a Grand Coalition because it would not be in the best interest of his party.

But appealing as her overture to a Grand Coalition may be to voters, it has triggered a scramble by all the main political parties to protect their respective voter bases to maximize their own vote counts to position for the coalition negotiations that will follow the election. Indeed, as Merkel slowly and methodically pulls her conservative CDU and very conservative CSU to her own strongly felt, more centrist domestic and European policies, it is triggering profound internal shake-ups in each of the main political parties.

The SPD, as is clearly evident to all, has run one of the most inept, incoherent campaigns in recent German political memory. Its chancellor-candidate Steinbrueck is all but finished in a political career by next Monday, so for the SPD itself, the battle now is about turning out its base to reach as close to the 30% as it can to avoid an internal party bloodletting as happened after its disastrous 2009 results.

That is translating into a campaign that all but ignores its Green Party coalition partner, which is facing its own travails, to rather focus on keeping its some 14% of its voters who are “Merkel Democrats” in the SPD camp and from straying to the ever popular Merkel on Sunday.

And the potentially seismic changes Merkel is forcing on the German political parties is perhaps nowhere more apparent than in the startling drop in Green Party support. Up until a few weeks ago, the Greens were seen as the party on the upswing, rising to as much as 14% in national polls. But in the current campaign, the party platform has ended up in the hands of the party’s left-leaning “fundos” who put the campaign stress on social inequality.

Inequality is a major campaign issue, but it is one that Merkel has co-opted as well. So for the Greens, the shift looks to have backfired badly; driving many of the fundos to die Linke, the far left party, while alienating a good number of the Greens’ so-called “realos,” or economic conservatives, who are drifting to Merkel’s more centrist-positioned CDU. The result is that the Greens have plunged to perhaps 9% and no more than 10% in the national polls, while die Linke itself is holding onto a surprisingly firm 10%.

And in the case of the FDP, which has struggled to define itself more distinctly by positioning to the right of Merkel, its party leader Phillip Roesler has in the wake of the party’s poor showing in Bavaria openly appealed for the second vote of CDU voters — in Germany, each voter has two votes, one for the constituency and on for the party — in a tactical effort to raise the FDP turnout.

Merkel and the CDU leadership have countered with their own “every vote for the CDU” campaign to maximize their own party turnout at the expense of the FDP to avoid a repeat of the Lower Saxony state elections last January, when the same tactical voting went too far and cost the CDU control of the state.

But tellingly, the panic-looking appeal by the FDP’s Roesler has the behind the scenes support of the more conservative wings of the CDU and CSU, who are hoping to keep Merkel wedded to the current coalition with the FDP, and away from centrist policies like a minimum wage, and above all, to deter the Chancellor from negotiating a Grand Coalition with the SPD.

Merkel’s 39%-40% Sweet Spot

How all of this shuffling of the campaigns in the final week before the elections and the repositioning by the main parties to prepare for the coalition negotiations will play out will become evident in the breakdown of the Sunday results.

The most recent FORSA poll immediately after Sunday’s Bavarian elections put the CDU/CSU at 39% and FDP at 5% versus the SPD at only 25%, the Greens at only 9% and the Left  Party at a stable 10%.

Overall, the mix of the German polling shows the races tightening up but with Merkel’s CDU/CSU still dominant at 39% to 40% and the FDP holding on just above 5% to perhaps as high as 6%, while the SPD, though rising, climbing at best to barely 28% with the Greens continuing to lose support to perhaps no more than 9%-10%.

Die Linke has held steady at a somewhat surprising 10%, while the other parties, including the fast fading Pirates and the much publicized, anti-Euro Alternative for Deutschland, are both well under the 5% threshold needed to win representation in the Bundestag.

Merkel’s personal popularity has dipped in the final weeks of the campaigning, but it still remains nearly twice that of Steinbrueck. Perhaps more telling in terms of getting out the vote, she has a stunning 98% backing of CDU/CSU voters, compared to around 64% of SPD voters supporting Steinbrueck.

And again, crucially 14% of the SPD voters are the Merkel Democrats who could still swing either way, and they in fact may determine the difference in whether Merkel can indeed get the Grand Coalition she seeks or go back to the FDP as her junior coalition partner.

If the Merkel Democrats swing Merkel’s way, it could lift the CDU tally a solid 39% or even above 40%, which would provide Merkel with the platform to dictate the terms of a coalition and which coalition partner she wants.

But if the Merkel Democrats fall back within the harbor of the SPD, perhaps scared back by the strong CSU showing on Sunday or a stronger looking FDP, it could be enough to undercut Merkel’s ambitions and keep her and the CDU locked into the details of ironing out the coalition terms with the more conservative CSU and FDP. That would especially be the case if the CDU second votes do indeed lift the FDP to 6% or better, enhancing their leverage, at the expense of driving the CDU total down.

Likewise, if the SPD manages to come within reach of 29%-30%, it means they will have indeed kept the loyalty of the Merkel Democrats and have lowered the CDU total, undercutting both Merkel’s ability to spurn a return to power with the FDP or to negotiate in a strong position with the SPD.

But if the CDU hits the sweet spot and wins between 39% and ideally as much as 40% as looks likely, it is likely to mean both that Merkel did manage to woo a large bloc of the SPD’s Merkel Democrats as well as limit the tactical second voting by the CDU supporters for the FDP. That in turn would maximize her leverage in the coalition negotiations, which we think, after an initial round of talks with the FDP, will be steered to the Grand Coalition with the SPD that she has long sought.

The catch then would be more in how long it may take to announce the new German government and its composition. With the SPD likely to be in shambles after suffering yet another loss after yet another terrible campaign, it will be difficult for Merkel to act swiftly, and the negotiations could take many days, if not many weeks.

That is especially true if the SPD, as its party chairman Sigmar Gabriel has threatened, abides by its call that Merkel should resign before coalition talks can begin, which simply won’t happen. A delay could also come if the SPD sticks to a vow to hold a party congress immediately after the election before it proceeds with coalition negotiations.

That, however, may only cause a delay, but not alter the final outcome, if the electoral results lead as we increasingly expect to a Grand Coalition government.

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