08 October 2005

EZA 695: Germany; Politics

German Election - CDU campaign loses momentum, but narrow victory still likely
Recent opinion polls – a rise of the far left PDS at the expense of the CDU – imply an increased likelihood of a grand coalition after the 18Sep elections. But even a narrow victory of the opposition parties, as still seems more likely to us, might herald a less stringent reform policy.

SummaryThe economic policy of a centre-right government seems to be reasonably clear, this is not, however, the case for the option of a grand coalition. Instead, cumbersome decision making processes, the awareness of a popular majority for the left and the perception of a persisting economic crisis might conspire in ways, which make German policy less rather than more predictable. On the other hand, the trend in opinion polls at least seems to make the election outcome a two way bet – between a grand coalition and a centre-right coalition. At this juncture we expect the recent bottoming out of CDU support in two opinion polls and increased scrutiny of the platforms of the left parties to increase the odds again for the CDU/CSU-FDP option. Despite significant shortcomings this would be the more market friendly option – for stocks in terms of labour market reforms and for bonds in terms of consistent tax reforms (EZA692/14Jul05).

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© Graham Bishop