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• Germany holds federal elections on September 22. The campaign is still in slow motion. Judging by current polls, the governing coalition is ahead by two to four percentage points but would fail to muster a majority in the next parliament. Nor would the Social Democrats and Greens win together. The most likely outcome is another grand coalition of CDU/CSU and SPD led by the CDU.
• Chancellor Merkel’s polling advantage remains strong on personal approval, European policy and the economy, while she slightly trails on social issues and taxation. The four biggest political parties have focused on a tax and social justice debate and skipped Europe (so far), education, energy and foreign policy. On taxation, numerous proposals for increasing taxes on the affluent to balance public finances and increase spending are on the table. A full-blown distributional debate would have to be more comprehensive, however.
• Peer Steinbrück, candidate of the SPD, must grapple with five headwinds: the euro issue (advantage Merkel), the low popularity of the tax hike proposals, Merkel’s personal approval lead and the legacy burdens of the Schröder years (pensions at age 67, labour market reforms). The SPD will stress social and taxation issues but must fight a two-front war against the more radical positions of the Greens and the Left Party on those matters.
• The outlook for post-election policy is one of continuity in European policy and modest changes to taxation and transfers. Uncertainty prevails over energy and almost every other topic.