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German Political Stalemate: Four Options on Table, None An Easy Way

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Although the selloff the euro as a result of a breakdown of Germany's coalition talks appeared short-lived, political instability in the country and the EU would remain in play for some time. We see four possibilities are present in the aftermath of FDP's walkout from the 4-week exploratory talks: 1 New election, 2. Grand coalition (a CDU/CSU+SPD Government), 3. Restart of the Jamaica talks (CDU/CSU + FDP+ Greens) or 4. Formation of a minority government by CDU/CSU with either the Greens or FDP. It appears that none of the above options is easier to be achieved as each has its own limitations and constraints. This report would analyze each of the four scenarios. Yet, assessing the likelihood of the scenarios at this stage appears premature as the developments remain fluid.

While the market had anticipated a Jamaica coalition government would likely be formed after the federal election in September, the negotiations collapsed with FDP walking out from the exploratory talks on Sunday night. The parties involved (CDU/CSU + FDP+ Greens) failed to agree on migration and energy policies, as well as other controversial issues. The FDP leader, Christian Lindner, explaining the walkout, indicated that there are 'irreconcilable differences' amongst the parties which 'have no common vision for modernization of the country or common basis of trust'. Executive Chancellor Angela Merkel described FDP's walkout as 'regrettable' and noted that it's 'a day of deep reflection on how to go forward in Germany'. She added that, 'as chancellor, I will do everything to ensure that this country is well managed in the difficult weeks to come'.

Resumption of Jamaican Talks: German President Frank-Walter Steinmeier, a SPD member and the former foreign minister, has called for the leaders to reconsider returning to negotiation table. He is scheduled to meet with the Greens and FDP on Thursday. We see the resumption of the Jamaican talks is challenging, if not impossible. Indeed, in our previous reports, we have mentioned that while CDU/CSU had preferred to work with FDP given the similarities in ideologies and policy platforms, FDP and Green are traditional rivalries. The two parties have very different views on various issues, ranging from labor and social policy, to immigration policy; from fiscal policy to EU integration. There is limited cooperation between the two parties in local level, let alone federal level. Concluding of the 4-week talks with a walkout has clearly explained the divergence and conflict.

Minority Government: If the FDP refuses to return to the negotiation table eventually, Merkel might consider forming a minority government, either with the Greens or FDP. Yet, Merkel has already indicated she would rather have another election than forming a minority government. A CDU/CSU + Greens minority government would miss 42 seats to reach the majority in the parliament while a CDU/CSU + FDP one would miss 29. In either case, one or two more parties would be needed to provide the 'supply-and-confidence' support to the government. It appears that no feasible candidate is identified for now to sign the 'supply-and-confidence' agreement due to the divergent views on critical political and economic issues. What Merkel is more concerned is that the arrangement might end up giving the far-right AfD more power in the parliament.

New Election: While Merkel noted her preference of a snap election to a minority government, recent survey suggests that the outcome would not make much difference. Germany would again end up with two choices- Grand Coalition or Jamaican Coalition. The latest poll of polls shows that CDU/CSU has still secured one-third of support, followed by 21% and 12% for SPD and AfD, respectively.

Grand Coalition: Upon receiving its biggest defeat since WWII, the SPD has pledged after the September election that it would be the biggest opposition. The SPD has attributed the loss of popularity and support to being a coalition partner of the CDU/CSU in the past term. SPD's leader Schulz reiterated that his party would not join Merkel after the collapse news. Yet, he noted that 'in such a situation, the sovereign, that is the voters, must reassess what is going on', adding that the party is not 'shy away from a new election'. The SPD would be meeting the President on Wednesday.

The situation remains fluid and it is difficult for now to assess which scenario has higher chance to materialize. What can be certain now is that political instability in Germany would continue for some time. the situation would also make it more difficult to implement significant reforms, both in domestic policies and EU integration.