© Dukascopy Bank SA
This year was marked by important electoral decisions in the European Union. The series was initiated by the Netherlands, following two more elections in France and the United Kingdom. Now, it is time for Germans to cast their votes in federal parliamentary election on September 24. All eyes will certainly be on Germany within the following months, as the country representing 15.97% of EU's population and 21.10% of the region's total GDP in 2016 has a potential to cause significant anxiety and have widespread implications throughout Europe. The fear of anti-EU agenda faded after Marine Le Pen's (France) and Geert Wilders' (the Netherlands) defeat in their national elections, thus diminishing the possibility of tremendous mind-set and action shifts in the European Union.
Structurally, Germany's federal election differs from other democratic countries where the winner takes it all. Its parliamentary body or Bundestag consists of 598 members who are elected for a four-year term. By and large, each citizen is entitled to two votes, each of which elects 299 members. The first vote appoints a representative from local districts in single-member constituencies; the other, however, backs a national party to achieve proportional legislative distribution in the parliament.
The most prominent parties of this election are the following six: the so-called Union parties consisting of the Merkel-led Christian Democratic Union (CDU) and its sister-party in Bavaria – the Christian Social Union (CSU), the Social Democratic Party (SPD), Alliance'90/The Greens, The Left (Die Linke), Alternative for Germany (AfD) and the Free Democratic Party (FDP). All these parties, except for the latter two that did not overcome the 5% hurdle, form the current Bundestag.
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The CDU/CSU and the SPD are considered to be the two favourites for this election, as both parties received collectively 67.2% of all the votes (41.5% and 25.7%, respectively). Thus, the main electoral battle for Chancellor's position is set to occur between Angela Merkel (CDU) (see picture above) and the former President of the European Parliament Martin Schulz (see picture below). In this regard, local elections may serve as an early indication of the possible outcome if considering the CDU's surprising win in North Rhine-Westphalia – a traditionally-SPD-led region forming one fifth of both Germany's population and its economic output.
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The latest Pollytix poll (July 5) demonstrates the prevalent positions of these two parties with 38.2% and 24.3% of votes for the CDU/CSU and the SPD, respectively. The remaining four linger slightly below the 10% mark. Nevertheless, the Conservatives' unexpected majority loss in the British general election on June 8 does show that strong favourites may lose support, thus resulting in internal political uncertainties. As polling data is considered to be only a snapshot in time rather than a forecast, public support may shift tremendously in response to political developments. One example is the so-called Schulzeffect when the SPD saw a boost in popularity in the wake of its leader Schulz announcing his candidacy. This enthusiasm, however, proved to be temporary, resulting in relatively weak support in recent weeks. Thus, some analysts believe that a tight race for all the involved parties could be expected, as a rise in populism and geopolitical concerns may increase support for more radical parties such as Alternative for Germany and The Left.
A distinctive characteristic of the German electoral system is the formation of coalitions, as parties rarely manage to win an election with absolute majority. Thus, they must choose wisely their coalition partners in order to exercise power effectively. Analysts offer various possible coalitions; however, the highest probability is put on three outcomes. Firstly, considering that both the CDU and SPD are expected to win the majority of votes, both parties may decide to form the Grand coalition. The given arrangement would require mutual concession in terms of who is to lead the chancellery and the Ministry of Finance. The position of Chancellor would be allocated to the party winning the most votes.
Secondly, a more favourable coalition for Merkel may be the so-called Jamaica formed by the CDU, the FDP and The Greens. The latter have already confirmed its willingness to form a coalition with the CDU. This formation, however, is heavily dependent on the FDP's ability to overcome the 5% hurdle.
Lastly, the SPD may decide to form a coalition without the CDU, thus electing Martin Schulz as Chancellor. Likely partners to this arrangement are The Greens, The Left and the FDP. Nevertheless, this scenario may only materialise under two conditions, namely, the CDU's inability to win most votes and the willingness of other parties to form a coalition without Merkel.
By and large, financial markets responded positively to Merkel running for a fourth term, as her continuous leadership is regarded as an equivalent to international continuity and stability. However, Germans themselves were less enthusiastic, thus responding to unfinished structural reforms, moderate infrastructure spending and Merkel's open migration policy in the wake of various terrorist attacks that have struck Europe within the last years. In general, all odds are currently in favour of Merkel winning the German federal elections for the fourth consecutive term. Nevertheless, previous electoral experience does show that voters are relatively sensitive to political developments and external shocks during electoral campaigns, thus Merkel's victory should not be taken for granted.
© Dukascopy Bank SA
© Dukascopy Bank SA