Germany – AfD’s Rise Narrows Coalition Options

The next federal election does not fall due until September 2021, but the jury is still out on whether Chancellor Angela Merkel will complete her full term in office, having turned over the reins of the main-governing CDU to Annagret Kramp-Karrenbauer. Both the CDU and its Bavarian sister party, the CSU, have become divided over the hot-button issues of immigration and environmental protection, and a worsening economic outlook has likewise strained the center-right parties’ partnership with the center-left SPD.

The results of state elections held earlier this month in the former East Germany suggest that the far-right AfD, while growing in popularity, is still not in a position to challenge for power. However, the erosion of support for both the CDU and the SPD makes clear that forming a majority federal government will almost certainly require the inclusion of at least three parties.

Although at least some CDU-CSU conservatives might entertain the possibility of teaming up with the AfD, it is unlikely that a third partner would be similarly inclined. As for the SPD, it will choose a new leader later this year from among 15 contenders, and evidence of grassroots pressure to tack to the left dims the prospects for the creation of a “grand coalition plus” government, which will further complicate the process of coalition-building following the next elections.

The CDU’s popularity has clearly been undermined by Merkel’s very liberal asylum policy, she has also come in for criticism for weak regulatory oversight that led to the diesel emissions scandal and what many Germans view to be an overly accommodating posture toward China. However, any steps she takes to appease her critics on the environmental front will provide fodder for attacks by the AfD, and with the economy already slowing, Merkel is understandably reluctant to antagonize Beijing.

The chancellor is hoping she can redirect the discontent with the elimination of the solidarity tax, which affects the middle class and wealthy, and a reduced tax rate for SMES. However, those proposals are not part of the coalition agreement, and securing buy-in from the SPD could be a tough sell.

Quarter-on-quarter growth contracted by 0.1% in the April–June period, and the weakness of high-frequency indicators has left German officials bracing for a second consecutive negative reading in the third quarter, which would signal a technical recession. That prospect has generated pressure for policy loosening by the Finance Ministry, which is headed by Olaf Scholz, a member of the SPD who is challenging for the party’s leadership. Germany’s longer dated bond yields are rising on speculation that the government might implement a shadow budget of investment measures to side-step stringent debt-brake rules.

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