The consequences for Europe are not necessarily negative. The fallout on the economy is likely to be negligible given the strength of the underlying momentum……
After more than a month of negotiations between the FDP, the CDU, and the Green Party, Angela Merkel’s attempt to form a coalition government has failed. Lindner, leader of the FDP, officially abandoned talks last Sunday, on irreconcilable differences with the Green Party on policies addressed to refugees and the environment. A wholly new crisis has now opened up for Germany the first in post-war history. The country traditionally singled out as a beacon of political stability risks being left without a government until the spring. President Steinmeier wants to avoid calling new elections at the beginning of 2018, a prospect which, however, cannot be ruled out. A new round of talks among the same parties seems highly unlikely. One option could be a minority CDU-CSU government, which could be approved by the Social Democrats, although Merkel has said she would prefer new elections over leading an unstable government. President Steinmeier has invited the SPD to consider the possibility of seeking an agreement with the Christian Democrats, and has received a positive response. However, Schulz is only prepared to revoke his decision to stay at the opposition, following the severe setback incurred at the September elections, if the CDU makes very significant concessions in terms of the government agenda and cabinet positions.
Repercussions at the political level could be stronger, but not necessarily negative. It is hard to say whether a repeat of the election would open up new scenarios. Survey data continue to indicate as the only viable solutions a Jamaica coalition, or a Grosse Koalition . In our view, Merkel is unlikely to step aside and renounce a fourth mandate as Chancellor if new elections are called, unless the Christian Democrats are shown by polls to be losing significant ground. As it is the case in other countries, the political scene in Germany is feeling new pressures: the advancement of populist movements has eroded consensus for the traditional parties, and for the left in particular, whereas immigration issues have boosted the radical right-wing formations. For now, there is no easy solution on the horizon.
For what concerns the role played by Germany in Europe, the consequences of the current crisis may not necessarily be negative. The fact that the Liberals have pulled out from negotiations should be viewed positively, given their more markedly intransigent stance on European issues; however, the differences among the various parties in terms of their views on what kind of economic and monetary union should be pursued, must not be overestimated. The main risk is a slowdown in the current debate on the reform of the European institutions.
On the other hand, the political crisis will probably not reap noteworthy effects on the trend of the economy over the next few months. As signalled by the data released in the past few days, Germany is still growing at a strong pace, driven by accelerating foreign orders, unscathed by the appreciation of the exchange rate. Today, the IFO index was up from 116.8 to 117.5, confirming the very positive indications provided yesterday by the monthly PMI survey. Our growth forecasts are exposed to upside, rather than downside, risks. Precedents in other countries, such as the Netherlands, show that weak governments, or extended periods without a stable majority in parliament, are not necessarily a bad thing for the economy. All the more so in a country like Germany, which is in no urgent need to undertake structural reforms, and can already boast a federal balance sheet at breakeven levels, and low public debt, set to drop further
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