LDP’s dominance in Japan to be diluted

On September 26th Germany will go to the polls to elect a new government, leading to a new chancellor for the first time in 16 years. For a country where politics is usually a staid affair, this election is shaping up to be unpredictable: a contest that could result in half a dozen different coalition permutations. The constant, however, is that under any of the most likely possibilities, policymaking in Germany will remain centrist and consensus-oriented.

The Economist Intelligence Unit considers Olaf Scholz, the Social Democratic Party (SPD) candidate, the most likely next chancellor. After trailing the Christian Democratic Union/Christian Social Union (CDU/CSU) and The Greens in the polls for the best part of three years, in the six weeks before the election the SPD has opened up a stable lead of about 5 percentage points in voter intentions. In large part, this reflects the lacklustre campaign and damaging gaffes of the CDU/CSU chancellor candidate, Armin Laschet. In contrast, Mr Scholz, who is currently the finance minister, appears to be a safe pair of hands.

Who becomes chancellor will however depend on the outcome of the coalition negotiations. Current polling and seat projections suggest that no two-party coalition will have a majority, so barring polling swings that would allow for a renewed grand coalition, this means that Germany is set to get its first ever three-party federal government. This will force two ideologically aligned parties—the SPD and The Greens on the centre-left, or the CDU/CSU and the liberal Free Democratic Party (FDP) on the centre-right—to govern with a third party that is a less comfortable fit.

We consider the most likely result to be an SPD-Green-FDP “traffic light” coalition. Having walked out of coalition negotiations after the 2017 election, the FDP has a strong incentive to make this work, and we expect this to be Mr Scholz’s first coalition-building attempt. Should this fail, alternative possibilities could include a CDU/CSU-Green-FDP “Jamaica” coalition or a SPD-CDU/CSU-Green “Kenya” coalition. The prospect of a left-wing SPD-Greens-Left Party government has prompted some nervous media commentary, given the Left Party’s radical views on foreign policy, but is highly unlikely to be pursued by the centrist Mr Scholz.

There is still a lot of uncertainty around both the vote shares and the coalition negotiations. We expect a caretaker government for some months, limiting progress on European policy initiatives. However, strong domestic policy continuity can be expected by the next government, regardless of its exact shape. We expect a more expansionary fiscal stance in the short term, boosting investment—especially on the climate agenda and digitalisation—before the debt brake is reimposed, probably from 2023. The next government will be keen to boost the production of electric vehicles, semiconductors and renewable energy in particular.

Find out more about key upcoming elections and their potential impact on your business by visiting our election hub