Chancellor Angela Merkel’s center-right CDU and its Bavarian sister party, the CSU, finished on top at the parliamentary elections held on September 22,  but suffered a net loss of 65 seats, reducing its total to 246. The center-left SPD, the junior partner in the outgoing grand coalition government, saw its seat total reduced by 40, and leader Martin Schulz has decided that the party will work on rebuilding its support from the opposition benches. With Merkel ruling out any form of cooperation with either far-right AfD or The Left, her only path to forming a majority government is a coalition that includes both the centrist FDP and the center-left Greens.

Given the policy differences among the four parties, negotiations to form a so-called “Jamaica coalition” will test Merkel’s abilities to forge consensus, and there is a real possibility that she might fail, in which case she may have no choice but to attempt to govern without benefit of a formal majority. Merkel reached an agreement with CSU leader Horst Seehofer to impose a cap on the number of refugees permitted to enter the country each year, with exceptions made in the event of an emergency. However, both the FDP and the Greens oppose formal limits.

The Greens have very different ideas than the CDU-CSU and the FDP about climate change, energy policy, and reform of the pension system and labor and tax rules. The FDP previously governed in partnership with Merkel’s bloc during 2009–2013, and paid a heavy price at the 2013 elections for failing to gain secure the backing of the CDU-CSU for key planks of its platform. Now that the party has returned to the Parliament, FDP leader Christian Lindner is not going to repeat that mistake.

Among Lindner’s demands could be his appointment as finance minister, a post vacated by Wolfgang Schäuble, whom the FDP leader criticized as too lenient about the terms of EU loans to Greece and tax policy. Merkel may be reluctant to entrust the Finance portfolio to a member of the FDP, which contains a vocal euroskeptic faction. The party’s advocacy for middle-class tax relief is inconsistent with Merkel’s strategy, but the FDP favors both deregulation and privatization, and it is unlikely that an FDP finance minister would veer far from the path of liberal orthodoxy.

As such, the biggest risk in the near term is the possibility that Merkel will fail to produce a majority government. In that event, her administration’s reform agenda would face delays, dilution, and obstruction as it makes its way through the legislative process.

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