Germany will have a new federal chancellor following the September 2021 legislative election when Angela Merkel will retire. We look at the likelihood of a left-leaning government entering office for the first time since 2005 and what this would mean for business.

  • Merkel’s centre-right Christian Democratic Union (CDU) and its Bavarian sister party the Christian Social Union (CSU) seem well-positioned to win a fifth consecutive term in office, but the probability of a left-wing government taking office is higher than current polls suggest.
  • Questions of social justice and climate change are likely to dominate next year’s election campaign, offering left-of-centre parties a promising campaign platform opportunity.
  • The COVID-19 pandemic will leave the CDU/CSU-led government vulnerable to sudden shifts in support as the social and economic consequences become more apparent over the coming months.
  • If a left-wing government secures a majority, businesses will likely face higher operating costs because of increased social security contributions and taxes.
  • However, heightened political polarisation under a left-wing government would likely prove the more significant challenge for operators in the longer term.

CDU/CSU poll lead not as stable as it seems

A little more than a year before the federal election, a coalition of the CDU/CSU and the ecological Green Party (Greens) is widely considered the most likely outcome. Indeed, the CDU/CSU holds a commanding lead, and a government without the CDU/CSU appears unlikely – at a first glance at least. Assuming support for the far-right Alternative for Germany (AfD), which has established itself firmly at the federal level, does not collapse, left-of-centre parties – the centre-left Social Democratic Party (SPD), Greens and the far-left The Left – are likely to struggle to form a government.

However, popular support has become very fluid and the current strength of the CDU/CSU is due in large part to widespread approval of its response to the COVID-19 pandemic. Poll ratings for the CDU had fallen to historically low levels prior to the pandemic and the recent gains could be quickly reversed as the social and economic consequences of the pandemic increasingly manifest over the next months.

Unemployment is likely to rise and a wave of insolvencies is expected towards the end of the year, or in 2021 should emergency rules protecting companies from going into administration be extended. If public dissatisfaction with the government’s handling of COVID-19 should grow, or past decisions become subject to criticism for suspected mismanagement, the CDU/CSU would likely be impacted more. Health Minister Jens Spahn and Merkel have been the most visible “crisis managers”, alongside centrist Finance Minister and Vice Chancellor Olaf Scholz (SPD).

Merkel’s retirement is another factor that the CDU could struggle with. Merkel remains Germany’s most popular politician. Her pragmatic outlook has attracted centrist voters to the CDU. Whether such voters will continue to support the party in the next election will depend on whom the CDU nominates for chancellor and who will become the party’s next leader.

Window of opportunity for left-leaning government

Broader political and social trends also mean that the probability of a Red (SPD)-Red (Left)-Green or Green-Red-Red (R2G/GR2) coalition is higher than current opinion polls imply. Growing concerns about climate change among voters mean the Greens now have a broader, more stable support base. Furthermore, the combination of a leftward shift on policy and the nomination of Scholz to lead the SPD has the potential to pacify the party internally, and the SPD appears more united and focused for the first time in years.

The SPD’s shift to the left does not remove all obstacles to a coalition with The Left. The areas of foreign and security policy will remain particularly contentious between the Greens and SPD on the one side and The Left, which calls for the abolition of NATO, on the other. However, there is more common ground – particularly on social security and climate change – between the three parties.

Above all, the SPD, The Left and some Greens likely sense a window of opportunity for convincing voters of a “progressive alternative” to another CDU/CSU-led government. One factor in this calculation is voter fatigue with the CDU. A more important factor is that the economic consequences and hardship of the COVID-19 pandemic will result in heightened demand for traditionally left-wing policies, such as stronger protections for employees, increased social security and higher taxes on the wealthy.

A shift in the public mood towards such policies would likely intensify pressure on the struggling centrist, economically liberal Free Democratic Party (FDP), which could tilt the electoral arithmetic further towards a R2G/GR2 government. The FDP has come under pressure from the Greens on the left and the AfD on the right and is struggling to stay above the five-percent threshold required to win parliamentary representation. If the FDP, which is ideologically closer to the CDU/CSU and would staunchly oppose any coalition including the Left, drops out, the R2G/GR2 potential coalition would be likely to benefit the most. A failure of the FDP to win representation would also deprive the SPD and Greens of another option to form a government without The Left.

Who will pay for it?

In Europe, Germany has mobilised unparalleled resources to cushion the blow that COVID-19 has dealt to the economy. In total, Berlin has made available almost EUR 285bn in direct fiscal measures alone (not counting deferred taxes and credit guarantees) to prop up companies and bolster social security measures protecting jobs. After years of budget surpluses and falling public debt, COVID-19 threatens to undo a decade of fiscal consolidation. Public debt is forecast to rise to 75% of GDP in 2020 from 59.8% in 2019 as a result of government support to the economy.

How to repay the extra funds is likely to feature prominently in next year’s election campaign, alongside climate change and managing the “green transition”. Crucially, the issue offers the three left-of-centre parties, which broadly agree on more ambitious climate policies, a second common theme to coalesce around and mobilise voters.

At the height of the crisis in early April, SPD co-leader Saskia Esken proposed a one-off levy on wealth, which would likely also impact businesses, as one way to consolidate public finances. While even SPD ministers, above all Scholz, were keen to avoid such a discussion at a time of national emergency, a debate is gathering momentum. The Left supports such a measure and the Greens are at least open to it.

Until the election in 2021, Scholz has ruled out budget cuts and tax rises, but he also stated in May that once the COVID-19 crisis was over a debate was necessary on how to pay for it. He added that the SPD would push for a more equitable tax system during the next legislative term, which means such a measure is likely to feature prominently in the party’s manifesto.

Likely policy priorities of a left-wing government

Investors, as well as most of Germany’s business community, would likely view an R2G/GR2 government with scepticism or even outright concern, for fear that costs for business will increase. While it is too early to discuss specific policy proposals, the current debate provides some indications about the future priorities of such a government.

A significantly higher minimum wage (currently EUR 9.35; due to rise to EUR 10.45 until 2022) and better pay for professionals on low salaries are likely to be high up on the agenda. COVID-19 has placed additional focus on the issue of fair wages as the broader population realised the critical importance not only of medical professionals but also of people filling supermarket shelves, delivery drivers and truckers. Expanding social security would be another priority, and the SPD and The Left would likely insist on abolishing the current basic social security for the unemployed to replace it with a less restrictive and more generous system.

Financing this shift would either require more direct financing through taxes (most likely on wealth, higher incomes, digital services and carbon emissions) and higher social security contributions, both of which will be rejected by businesses on the grounds of undermining Germany’s international competitiveness.

R2G/GR2 would also put an emphasis on speeding up Germany’s green transition, likely introducing regulatory measures to accelerate Germany’s push towards carbon neutrality (currently by 2050). Speeding up the phasing out of coal power, which is supposed to be completed by 2038, would be one priority in this regard, though a wider tightening of greenhouse gas emissions limits would also be on the cards.

Germany’s intricate system of checks and balances between the federal and regional level would moderate major, quick policy shifts to a certain extent. Moreover, the clear prioritisation of the green transition would likely result in investment opportunities and increased state support for green investments. An R2G/GR2 government would also continue to prioritise investments in public infrastructure.

Polarisation to peak?

The shifts in the political landscape that an R2G/GR2 government could set in motion might prove more consequential in the longer term than any policy shift by such a government. Particularly in the eastern part of the country, politics would become highly polarised. While The Left has its support base mainly in this part of the country, voters from the centre-right and right still loathe the party, which is viewed as the successor of the ruling communist party in the former East Germany (1949-90).

As some eastern CDU party associations are already informally debating whether future cooperation with the AfD is possible, R2G/GR2 would likely push them further in this direction. More broadly, the CDU would likely shift to the right, abandoning Merkel’s centrist, pragmatic course. This would increase political polarisation at the federal level, which would probably manifest in rejecting any collaboration with the government and seeking to obstruct it through the Federal Council and Constitutional Court wherever possible. Apart from the policy uncertainty this would create, a deeply polarised Germany would be unlikely to continue to function as an anchor of stability in Europe more widely.

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