Event
On January 12th the Christian Democratic Union (CDU), its smaller sister party the Bavarian Christian Social Union (CSU) and the Social Democratic Party (SPD) concluded preliminary coalition talks with an outline of a potential coalition agreement. This needs to be approved by the SPD members at the party conference on January 21st before formal coalition negotiations can begin.
Analysis
According to media reports, the main stumbling block in the negotiations was finding a compromise between the SPD and the CSU. The CSU wanted to move policy to the right in areas such as migration and integration, but the SPD leader, Martin Schulz, needed to extract significant concessions from the CDU/CSU in order to convince his base of the merits of a grand coalition, as the SPD membership has so far been quite hostile to the idea of another four years as a junior partner in a government led by Angela Merkel. This reluctance of the SPD membership will remain a risk.
The agreement, which will serve as a broad outline for the full coalition agreement, lacked a clear overarching vision for the future of Germany; rather it read as a list of compromises between the two sides. Although the SPD failed to get an increase in the top tax rate into the agreement, as media reports suggested it had been vying for, it did manage to get the CDU/CSU to agree to more openness regarding proposals to reform the EU and the euro zone, including the possibility of enlarging the EU budget and allocating funds for additional investment in the euro zone. Meanwhile the CSU's long-cherished wish for an annual cap on the number of immigrants was fulfilled, albeit seemingly as a goal instead of a hard cap.
Before the final round of talks started several of the participants had pointed out that failing to reach an agreement would lead to the end of their political career. Although this would not necessarily be the case for Ms Merkel, she has been significantly weakened by the struggles so far to form a new government. She is likely to survive the current turmoil, but the battle to succeed her—possibly before the end of her four-year term—will weigh on political stability.
Impact on the forecast
The agreement is in line with our forecast of another grand coalition, although the risk of the SPD membership not agreeing to formal coalition talks, or a breakdown of those talks, remains high.
