Macro of the Week – German coalition considerations

Mon 22 Jan 2018

German elections in November were met with cautious optimism by markets, with Angela Merkel’s CDU party gaining the most seats and seemingly in position to lead a coalition, so maintaining the status-quo in German politics. However negotiations have proven more difficult. The SDP, which claimed the second most seats, initially planned to be the main opposition party to prevent the AfD from using this platform. However the CDU’s inability to work out a coalition with other parties required the SDP to enter negotiations. Similarly to the Liberal Democrats in the UK, the SDP were punished by voters for pandering to the CDU last time they were in coalition, hence why they are pushing a firmer line this time around. In recent years Germany has been running a budget surplus as the fiscally conservative CDU have been able to implement their policies relatively unopposed. However it is becoming increasingly likely this time around they will have to agree to greater fiscal expansion and reduced budget surpluses. The SDP are likely to push for this expansion to come through higher social spending than through tax cuts, despite the fact that Germany will shortly have the highest corporate tax rate in the OECD.