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Social Democrats’ Narrow Win Over Merkel’s Bloc Leaves German Government in Limbo

Bloomberg logo Bloomberg 9/27/2021 Patrick Donahue, Birgit Jennen and Arne Delfs

(Bloomberg) -- Olaf Scholz of the center-left Social Democrats defeated Chancellor Angela Merkel’s conservatives in an extremely tight German election, setting in motion what could be months of complex coalition talks to decide who will lead Europe’s biggest economy.

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Scholz’s SPD, the front-runner over the final weeks of the campaign, took 25.7% of the vote Sunday, while the Christian Democratic-led bloc under Armin Laschet 24.1%, according to provisional results. Both men said they aim to head the country’s next government and all the parties -- including likely coalition kingmakers the Greens and the pro-business Free Democrats -- will hold separate meetings Monday in Berlin to discuss the next steps.

To sustained cheers and applause from supporters at party headquarters Monday, Scholz said that voters had sent a clear signal that they want him as chancellor, and that Laschet and his CDU/CSU bloc should go into opposition.

“We will take on the task that the citizens have given us,” Scholz said. There is sufficient overlap between the SPD, Greens and FDP programs to be able to form a government, he added.

A defiant Laschet had insisted to demoralized party colleagues Sunday night that he too will try to form a coalition, even though the conservatives slumped to their worst result ever, plunging below 30% for the first time.

After 16 years under Merkel’s pragmatic centrist leadership, the outcome of the vote will have wide-ranging implications for Europe and the West. Merkel will remain in office until a new government is in place, and if she stays through mid-December she will overtake Helmut Kohl as Germany’s long-serving postwar leader.

Here Are the Sectors to Watch After German Vote: Taking Stock

The fragmented political landscape means three parties will likely be needed to secure a majority in the German parliament for the first time in decades. A repeat of a “grand coalition” of the SPD and the CDU/CSU is still mathematically possible though both sides have effectively ruled it out.

Key to the formation of a new administration is whether the Greens and the FDP can make common cause even with starkly different objectives in areas like climate and finance policy.

FDP Leader Christian Lindner proposed talks with the Greens before they engage with the two biggest parties, while noting that the FDP has more in common with the Christian Democrats than the SPD.

Konstantin Kuhle, the FDP’s spokesman on domestic policy, said Monday on ARD television’s breakfast show that although a coalition of CDU/CSU, Greens and FDP is “much more likely” than a few weeks ago, the SPD’s “strong result” had to be taken into account. Asked whether the FDP is set on running the finance ministry, he said it’s an “important point” for the party.

Battle for the Chancellery © Bloomberg Battle for the Chancellery

Anton Hofreiter, who heads the Greens’ parliamentary caucus, disagreed with Kuhle’s assessment, saying that it had been a “catastrophic personal result” for Laschet, and a three-way tie-up of CDU/CSU, Greens and FDP was not more likely.

Video: Germany's Social Democrats beat Merkel's party (Reuters)

“In the end it’s about having a good coalition” that is able to tackle challenges like the climate crisis, Hofreiter said on ARD. The Greens and the FDP will meet initially in “small groups” to explore what they have in common, he added.

European stocks climbed Monday. Germany’s DAX Index outperformed as investors were relieved that the election result ruled out a hard-left coalition. Renewable shares gained thanks to the best-ever showing by the Greens.

What Bloomberg Economics Says...

“Long and arduous negotiations lie ahead before a coalition government can emerge. That’s likely to mean an extended period of uncertainty for financial markets as well as economic and fiscal policy.”

-- Björn van Roye, Senior Global Economist. Click here for more coverage.

“When a new government is eventually formed it is almost certain to involve the Greens, implying a greater focus on climate change policies,” said Steven Bell, chief economist at BMO GAM. “The feasible coalitions would involve compromise on all sides and imply no major policy shift.”

Laschet is clinging on, but the mood was bleak at the CDU headquarters in Berlin Sunday night, where activists were digesting the prospect that the conservatives may no longer be the biggest party.

Several people covered their mouths in apparent disbelief when the exit polls were published and the only moment of slight encouragement came with indications that the SPD won’t be able to form a majority with the Greens and the anti-capitalist Left party.

Close Race © Bloomberg Close Race

The Greens came in third on 14.8% -- their best-ever result, while the FDP got 11.5%. The Left slumped almost by half to 4.9% and support for the far-right Alternative for Germany fell to 10.3%.

The closeness of the race underscores the uncertainty facing Europe’s economic motor. Germany’s industrial model is under threat as value shifts away from mechanical engineering, while the country’s exporters risk getting caught up in geopolitical tensions, especially between the U.S. and China.

Read more: Germany’s Next Leader Faces Five Big Problems Left by Merkel

A new government will need to address the issues Merkel left behind, including aging infrastructure and a lack of investment in digital technologies. The most pressing issue is weaning its auto industry and its energy system off fossil fuels without destabilizing the economy.

“We will fight in coming days to make sure that Olaf Scholz becomes chancellor,” SPD General Secretary Lars Klingbeil said on ARD. “The citizens want that.”

Read more:
Germany’s Scholz Lays Down Rules for Future Coalition Allies
How a Scholz-Led Government Could Transform Germany and Europe
How Germany’s Next Government May Shape Up: Coalition Scenarios
As Merkel Exits, Here’s Why It Matters Beyond Germany: QuickTake

(Updates with Scholz comment from third paragraph)

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