adminFRANKFURT. – Germany may adopt a slightly softer tone towards its European partners, while still insisting on reforms in return for bailouts for debt-wracked countries, following this weekend’s elections, analysts said yesterday.In a stunning election triumph, German Chancellor Angela Merkel and her conservative CDU and CSU parties scored their best result in 23 years in general elections on Sunday, winning 41,5 percent of the votes, not far off an absolute majority. But Merkel must now start the process of haggling with potential partners to find a governing alliance for Europe’s biggest economy.
And a so-called “grand coalition” with Social Democrat party – a power-sharing arrangement Merkel used in her first term between 2005 and 2009 – is looking the most likely outcome.
Analysts believe that such a coalition heralds no major policy changes, particularly with regard to Europe. Indeed, with the centre-right and centre-left sharing power could bring much-needed progress in vital European integration, analysts said.
“Most Germans want a grand coalition led by Merkel according to opinion polls,” said Berenberg Bank chief economist Holger Schmieding.
“The impact on policy will be small, with hardly any change on the European level and a modest tilt towards a centre-left agenda at home,” he said.
“Overall, the election outcome should be interpreted fairly positively: a grand coalition would have large parliamentary majorities in both Houses of Parliament,” said analysts at Citi Research in a note to investors.
UniCredit economist Andreas Rees said “a renewed” grand coalition will continue to steer a euro-friendly course.
“It could even be the case that the new government is (marginally) more constructive on Europe than before,” he said.
Even with the start-up anti-euro party, the AfD, scoring 4,7 percent of the votes – not enough to win it any seats in parliament – “the overwhelming majority of Germans remains fully committed to the European cause”, Rees pointed out.
“The continuation of euro-friendly policies after the election will enable further much needed progress in European integration,” he said.
Gilles Moec, co-head of European Economics Research at Deutsche Bank, said “as we are probably moving towards a CDU-SPD coalition, and since the Bundesrat (or Upper House of Parliament) continues to be dominated by the centre-left, it is likely that Germany will not break away from the reformed ‘Sozialmarkwirtschaft’ (social market economy) it has inherited from the (SPD chancellor Gerhard) Schroeder and past Merkel governments”.
Germany’s stance on Europe through the crisis “has been increasingly co-managed between CDU and SPD, while Merkel faced increasing dissent in her own party and FDP was in favour of a tougher approach to the periphery”, Moec told AFP.
“In a coalition this co-management would become more formal, but the overall message from Berlin to the rest of Europe is unlikely to change,” he said.
Thomas Harjes at Barclays Research suggested it could take some time before Merkel’s CDU/CSU parties strike a deal with the SPD.
In 2005, the coalition talks lasted two months.
With the CDU/CSU winning around 42 percent of the votes compared to 26 percent for the SPD, Merkel’s conservatives “would be the stronger partner but the SPD may still insist on some of its key policy proposals”, Harjes said.
In terms of domestic politics, these could include a nationwide minimum wage, higher income tax rates to finance additional investment and education expenditure, and stricter regulation, especially for the financial sector.
But “at the European level, we do not expect much change from Merkel’s current stance and continued support for weaker euro area member states”, he said.
Schmieding at Berenberg Bank believed that Berlin’s euro policies would remain “virtually unchanged” with “no euro bonds or other serious mutualisation of debt”.
Carsten Brzeski at ING DiBa similarly believed that “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,” he said.
“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,” Brzeski said.
Citi Research analysts cautioned that markets could be unnerved if coalition negotiations drag on for weeks.
“A grand coalition may also become unstable in the long run, as the SPD will likely try to avoid the same fate as in 2005-09 when it lost substantial voter support following its participation in a Merkel-led grand coalition government,” the analysts warned. – AFP.
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