Germany will elect a new Bundestag this Sunday (September 26). With Angela Merkel no longer a candidate, Germany will have a new chancellor regardless of the outcome of the election. According to current polls, the SPD would win the election with 25% of the vote, just ahead of the Union parties (CDU and CSU) with 22% of the vote. Behind them, the Greens are currently expected to get 16% approval. Election researchers predict 11% of the vote for the AfD and the FDP. The Left Party could get 7% of the vote.
Since a new edition of the grand coalition with the SPD and the CDU/CSU is not likely to be an option, three parties will be necessary to form a majority capable of governing (around 45-46% of the vote) in the parliament, given the current polls. Mathematically, both a center-left alliance (led by the SPD and the Greens) and a center-right alliance (led by the CDU/CSU and the Greens) would currently be possible. Should the SPD receive the most votes, as expected in the polls, it will first be tasked with forming a government.
A center-left government would, if the election announcements are implemented, provide tax relief for lower and middle incomes. In addition, the purchasing power of lower incomes would be strengthened by a significant increase in the minimum wage to EUR 12/hour (from the current EUR 9.5). This is to be counter-financed by higher taxes for the upper income brackets and by the introduction of a wealth tax. However, this kind of counter-financing would be difficult to imagine with the FDP in the coalition as a junior partner. For this concept, the SPD and the Greens would therefore have to rely on the support of the Left Party. In the short to medium term, a center-left government would boost Germany's growth. On the one hand, because tax relief combined with an increase in the minimum wage would raise the disposable income of lower- and middle-income households, with corresponding positive consequences for private consumption. On the other hand, a center-left alliance is more likely to be willing to use the fiscal leeway that Germany has for state investments (e.g. expansion of renewable energies, investments in energy efficiency, public transport).
In contrast, a center-right coalition would probably not bring about any drastic change in Germany's economic policy orientation. If the Greens were in government, however, environmental issues would be given greater consideration. In view of the EU’s much stricter climate targets, Germany will have to significantly increase its efforts to reduce greenhouse gas emissions. By 2030, the EU expects Germany to reduce its greenhouse gas emissions by a further 30%. From this point of view, with or without the participation of the Green Party in government, drastic measures for climate protection in Germany are to be expected in the coming years.
Since the interests of several parties will have to be reconciled in the course of the coalition negotiations, we expect lengthy negotiations. Voters and European partners will therefore probably have to be patient for some time before there will be clarity regarding Germany's new political direction.
EZ – Faster recovery expected
We raise our Eurozone GDP forecast for 2021 to 5.0%, from 4.4% previously, and for 2022 to 4.2%, from 4.1% previously. The main reason for raising the forecast in the current year is, on the one hand, a significant positive revision of GDP growth for 2Q. On the other hand, the strong momentum of the recovery in France and Spain is likely to continue in 3Q. The rapid decline in new COVID-19 infections, already in progress since mid-July, has contributed to this positive development in both countries (probably thanks to high vaccination rates).
EZ – Is inflation still rising?
Next week, the first flash estimate of Eurozone inflation for September will be published. In August, Eurozone inflation rose at an above-average rate to 3.0%. This was caused by low y/y comparables for some components. In addition, upward pressure from energy prices intensified due to the current tense situation in the European electricity and gas markets.
Due to persistently low comparative values from the previous year, as well as a continued rise in energy prices, we expect a further slight increase in inflation above 3.0% in September. With electricity prices having stabilized at a high level in recent days, upward pressure from energy prices may ease somewhat in October. Nevertheless, we expect inflation to remain at 3% or slightly above until the end of the year. However, in view of significantly higher comparative values, we forecast a declining momentum of inflation from January 2022 onwards.
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