Germany: Who will lead the next government? Four scenarios and its markets implications – Nordea

Germany will get a new Chancellor after the September elections and the course of German policies could change materially. Strategists at Nordea look at the most likely coalition options and try to estimate how financial markets would react if the chances of such coalitions increased. 

CDU/CSU + Greens (+FDP)

“The most likely government after the September vote will be led by the CDU/CSU and include also the Greens and possibly the FDP as well. Depending on the exact relative shares of the participating parties, we would expect such a government to commit to relatively strict climate targets and a limited public investment programme (priorities for the Greens), a return to a balanced budget without any significant tax hikes (a priority for the CDU/CSU) and a return to somewhat more flexible EU fiscal rules (compromise between the parties). Being a baseline scenario, the formation of such a government would probably not have big short-term market consequences. If the Greens were able to persuade the CDU/CSU into supporting even some relaxation of the debt brake, though unlikely, then the result would probably be a larger public spending programme and with that higher bond yields and a stronger euro.”

The Greens + SPD + FDP

“The Greens could seek to build a government with the SPD and FDP, even if they were not the largest party. Such a government would make a large public investment programme and further European integration more likely, though by no means sure, as the FDP would be against large-scale spending programmes and European initiatives. In addition, the debt brake could still seriously limit how much debt-financed investment such a government could provide, as changing the Constitution would probably be out of reach. Rising chances of such a government would probably put upward pressure on bond yields and the EUR and lead to narrower intra-Euro-area bond spreads due to the higher likelihood of a more supportive German stance towards Euro-area or EU level support mechanisms. Equities would likely record gains on the back of easy fiscal policies.”


“A majority government could probably also be formed between the CDU/CSU, the SPD and the FDP. We would expect such a coalition to favour rather strict fiscal policies, a strong commitment towards the debt brake and a return to relatively firm EU fiscal rules. The outlook for such a government being formed could put weakening pressure on the EUR due to higher chances of less stimulative fiscal policies and higher risks towards the future of the Euro area, downward pressure on German bond yields and equities and upward pressure on intra-Euro-area bond spreads. The likelihood of such a government is limited by the probable reluctance of the SPD to enter into another coalition with the CDU/CSU.”

The Greens + SPD + the Left

“The Greens could also seek to build a government with the SPD and the Left. Such a government would probably seek a large-scale public investment programme, financed as much as possible with new debt. The debt brake could again put some limits to such plans and force financing with sizable tax hikes instead. Such a government could also seek more investment spending on EU level financed by more joint EU borrowing, and could even call for more help from the ECB to finance such spending, but would probably also favour more labour market regulation. We would expect an increasing probability of such a government to be associated with higher uncertainty and higher market volatility. The higher public investment programmes would support the euro and higher bond yields, but the burden of increased regulation and higher taxes would work in the other direction. The equity market could also be hit by the higher uncertainty, at least initially. Current polling does not support the formation of such a government.”


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