Strategy Focus - Elections in Germany: difficult to lift the debt brake !

➢  Towards a new grand coalition led by the CDU-CSU. 
General elections will be held in Germany on 23 February, after the current coalition led by Olaf Scholz (SPD) lost a vote of confidence. According to the polls, the conservative CDU-CSU party - and its leader Friedrich Merz - would emerge victorious and form a coalition, either with the Social Democrats of the SPD or with the Greens. Given the fragmentation of the parliament, a broad tripartite alliance with these three parties may even be necessary. Despite its recent rise in the opinion polls, the far-right AfD will not be part of any coalition, but it will be the largest opposition party.
 
➢  A difficult compromise. 
Finding a government agreement will not be an easy task, between the expenditure, welfare and tax cuts promised by the CDU-CSU and the high-income tax hikes of the SPD or the Greens. The result could therefore include only moderate measures (a few tax cuts, a gradual increase in the minimum wage and a limited reduction in public spending).
 
➢  An economic model at a standstill. 
The German economy has been at a standstill since Covid. The economic model has been shaken by an accumulation of factors: 1) Covid, 2) the energy crisis following the war in Ukraine, 3) the drop in demand for German companies (Chinese slowdown and energy transition) and 4) increased competition from China. Possible US customs duties and a US military withdrawal would add fuel to the fire. 
 
➢ The issue of the debt brake. 
The central issue for the new government will be whether to change the restrictive budgetary rules, i.e. the ‘debt brake’, which has held back any growth in public finances. A loosening of these rules would allow the new government to boost demand and revitalise the economic model. However, reaching an agreement between the parties of the future coalition will not be easy. What's more, such a reform requires a two-thirds majority in Parliament, which is not guaranteed insofar as many opposition parties are opposed to it. The debate could last a long time.
 
➢  Towards a change of gear in terms of economic policy ? 
Over and above the short-term difficulties of reaching an agreement, a change in fiscal policy could give the euro area's largest economy renewed impetus. There is a significant need for investment to support the transition: in innovation, defense and public infrastructure. A more accommodative stance would have a positive impact on the country's economy and could allow a broadening of the equity market performance beyond large caps.

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