How Germany plans to move on from Merkel

The next set of national elections could be a serious test for countries which have struggled to contain the coronavirus pandemic. For Germany, this test is now just days away. A general election is coming this month - and it's the first that Angela Merkel won't be standing in since 2002.

Germany has steered a strong, steady course under Merkel, enhancing its reputation as a global economic powerhouse. Yet the loss of Merkel and unhappiness over lockdowns could lead to a surprise result. What effect might this have on Germany - and how could its economy and business environment change as a result?

Bridging the power gap

For many people, Angela Merkel and the CDU (her political party) are indivisible. Merkel has become the face of not just German politics over the past two decades, but the face of Germany itself. While other major nations have grappled with populism, Merkel has been a reliable presence, and a guiding influence in a difficult period for geopolitics.

All good things must come to an end, however, and Merkel has decided to step down as the party's candidate for Chancellor in the upcoming election. This isn't purely a benevolent decision - her popularity has taken a few hits - but it still belies growing uncertainty in German politics. The question is whether the CDU can find a voice without Merkel - and if not, who can step into the gap.

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With Merkel leaving, the CDU has placed its faith in Armin Laschet, a former journalist, MEP and Cabinet minister. But being elected as leader with just over 50% of the vote, not everyone in his party was convinced, let alone the country. With Alternative für Deutschland looming in the background, what effect could Merkel's decision to step down have on Germany's political and economic climate?

How are the parties shaping up?

The first thing to note about Germany is that it is inherently set up to create consensus, and avoid sudden and drastic shifts in governance. The proportional voting system used in Germany ensures that no one party can dominate, with most recent governments taking the form of coalitions. This contributes to German economic stability, as change is often slow, and hinders extreme voices.

This is not to say that there aren't concerns about how power might shift without Merkel, though. The newest and loudest contender is Alternative für Deutschland (AfD), a right-wing party which bases much of its rhetoric around immigration and asylum. Like many right-wing parties, AfD have since cottoned onto public dissent around coronavirus vaccines and restrictions, and could increase their 12.6% share of the vote in what was their first election.

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Equally looking to gain ground will be the two traditional left-wing parties, the SPD and the Greens. The SPD, usually the main competitor to the CDU, suffered their worst ever performance at the last election with 21% of the vote. The Greens meanwhile rose to 9%, and will be hopeful of capitalising on recent studies about the extent of the climate change crisis. Germany has made good progress on its Paris Agreement commitments, but many are calling for swifter and more dramatic action.

What would a new coalition look like?

The current government is the result of an alliance between the centre right CDU and the centre left SPD. This was a fractious process, and seems unlikely to be repeated. Given the CDU's reluctance to ally with AfD, there is a reasonable chance that a new left-wing alliance could emerge, likely involving the SPD, Greens, Die Linke and other fringe parties.

This would be interesting from an economic perspective. While the SPD would likely be a moderating influence, given their relative economic conservatism, such a coalition would likely differ from the CDU in two key ways. One would be the likelihood of reinvesting the country's surplus in some form of post-pandemic stimulus, taking a more Keynesian approach to fiscal policy.

The second would be the acceleration of climate action through a harder transition to new technologies, such as wind power and electric cars. Should Die Linke perform particularly well, there's also the potential for more extreme ideological shifts, such as strengthening antitrust laws, rebalancing income tax, and increasing taxes on corporations.

What's likely to happen?

Recent elections around the world have shown a general shift to the right, in response to a large number of factors. What's interesting then is whether Germany, where the ruling party is already the largest on the right, will buck this trend. A combination of voter fatigue and Merkel leaving will undoubtedly lead to a worse election result for the CDU, but the question is who ends up filling that void.

Polling so far suggests that the gap between the CDU and SPD is closing, despite being part of that ruling coalition. However, the polls also show that support for parties across the spectrum is incredibly fractured. The SPD are polling second, but on a paltry 20% compared to the CDU's 25%. The Greens and Free Democrats meanwhile are polling at 18% and 12% respectively.

What works in the SPD's favour is their joint leader, Olaf Scholz. Scholz is the current Vice Chancellor and finance minister, and represents continuity with the previous government. He has particularly benefited from a range of public appearances, including a major role during the coronavirus pandemic and the recent flooding in the West, where he was praised for his calm demeanour and clear crisis management. He has also emerged as the clear victor from the first round of TV debates, with the Green’s Annalena Baerbock polling second.

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As the economy is generally seen to have been managed well during the coalition, the prospect of maintaining economic policies while introducing more left-wing social policies could be a tempting one for the German public. Alternative für Deutschland meanwhile seem to have been stymied by a string of controversies, including the ousting of an official for extreme views, and that of a former neo-Nazi, which sparked major internal divisions.

With AfD currently sitting at 11% in polls, and an absence of similar far right parties for them to ally with, the danger they pose seems relatively minimal. The consensus in Germany is that the SPD will form a coalition with other parties on the left, having largely refused to join with the CDU last election. However, the continuation of the current Finance Minister would seem to ensure little change in terms of fiscal responsibility.

Germany's approach under such a government would likely be pragmatic, with a slight shift towards incentivising the kinds of businesses and investments that align with left-wing values. This may include further subsidies or grants for greentech businesses, and support for Germany's industrial base, encouraging car manufacturers to escalate their development of electric vehicles.

While there is the potential for some reconsideration of income and corporation tax, the post-pandemic environment and relative centrism of the SPD's fiscal policy should prevent any drastic changes. Instead, the focus will shift to supporting innovative businesses and encouraging skilled migration to Germany - both of which are good news for anyone who wants to start a business there.

For more information about German business and company formation in Germany, including accountancy, business bank accounts and VAT services, please call us on 0033 (0)1 53 57 49 10 or email us from our contact page and we’ll be happy to help.

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