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Merkel Begins Search for Ally After Record Election Victory - (Bloomberg)

Posted by Chris Advincula on Sep 23, 2013 7:04:00 AM

Chancellor Angela Merkel begins her search for a third-term coalition partner a day after an overwhelming election win gave her the biggest vote tally since Helmut Kohl’s post-reunification victory of 1990.

Merkel’s Christian Democratic bloc, which fell five seats short of a majority in the 630-seat lower house of parliament, still faces compromise on issues such as taxes, wages and European bailout policy. After voters threw out her Free Democratic allies, Merkel’s possible partners are her main Social Democratic rivals or the environmental Green party.

Coalition talks “will require difficult steps, because the party platforms were very different,” Armin Laschet, a deputy chairman of Merkel’s party, told Deutschlandfunk radio today.

With the Greens weakened by waning support, the chancellor may be left repeating a “grand coalition” with the SPD similar to her 2005-2009 coalition. Party leaders are due to meet today to discuss coalition options. The SPD’s chancellor candidate, Peer Steinbrueck, said late yesterday that “the ball is in Mrs. Merkel’s court.”

Polls suggest that a Christian Democrat-SPD alliance has the most support from voters and “they will almost certainly get their wish granted,” Holger Schmieding, chief economist at Berenberg Bank in London, said in a note to clients. “The impact on policy will be small, with hardly any change on the European level and a modest tilt towards a center-left agenda at home.”

Merkel’s CDU and its Christian Social Union Bavarian sister party took 41.5 percent compared with the 25.7 percent for the SPD, according to results from all 299 districts. The FDP had 4.8 percent, short of the 5 percent threshold to enter Germany’s lower house.

Euro Weakens

The euro fell 0.4 percent to $1.3518 at 10:40 a.m. in Frankfurt. The benchmark DAX Index, which has gained 14 percent this year, rose 0.2 percent.

During the campaign, Merkel said that insisting on reforms in euro countries that received aid was the only way to raise Europe’s competitiveness, citing the fall in German joblessness from a post-World War II high of 12.1 percent in 2005 following a labor-market overhaul. The German unemployment rate is now 6.8 percent compared to 12.1 percent in the 17-nation euro region. German 10-year bond yields are 1.94 percent, while comparable U.K. gilts yield 2.92 percent and U.S. debt 2.73 percent.

“The economy would be a really difficult area” in talks with the SPD, Christine Lieberknecht, a member of the CDU executive committee and premier of the eastern state of Thuringia, said in a Sept. 19 interview. She cited taxes and regulation, bailout policies, and education as key areas of disagreement.

Four Years

Merkel’s victory gives her another four years at the helm. If she serves the whole term as she said she intends, she will have spent 12 years as German leader, more than the 11 1/2 years managed by British Prime Minister Margaret Thatcher.

Should Merkel seek a coalition with the SPD, the party’s leadership will need to persuade their rank and file to join the chancellor in government. The SPD has scheduled a meeting of 200 party members on Sept. 27 to decide how to proceed with any such negotiations.

As a junior partner, the SPD would effectively be putting its fate in Merkel’s hands. Their previous partnership ended in 2009 with the SPD’s worst postwar result, 23 percent, a tally many in the party blame on the grand coalition and an inability to win credit for policies in a Merkel government.

Coalitions are the rule in the German political system and negotiations usually last from four to six weeks.

‘Very Difficult’

“It’s a very difficult question for us and it certainly won’t be answered today,” Thomas Oppermann, the SPD’s parliamentary whip, said today in an interview with N-TV.

The SPD campaigned on raising taxes on top earners, a measure that Merkel has rejected as “poison” for the economy. The SPD has also called joint euro-debt liability inevitable. Merkel has stood against such risk sharing throughout the debt crisis, saying that would remove the incentive for indebted states to balance their books.

While Germany’s first chancellor from the formerly communist east again made history with her election score, a third term takes her into uncharted waters to face the perils of a third Greek bailout and a potential breakdown in her 550 billion-euro ($743 billion) energy overhaul.

The FDP’s expulsion from the lower house, or Bundestag, was the first such defeat since the first elections of the postwar period in 1949. The Greens, with which the SPD governed from 1998 to 2005, took 8.4 percent, and the Left Party got 8.6 percent. The anti-euro Alternative for Germany had 4.7 percent.

Merkel’s Score

Merkel’s score compared to Kohl’s 43.8 percent in December 1990, two months after reunification of East and West Germany. She’s now set to follow Konrad Adenauer, Kohl and Helmut Schmidt as a three-term leader.

Merkel was first elected in 2005, yet it was the euro-area debt crisis spreading from Greece from 2009 that dominated her second term and may dictate her political legacy.

As Germany became the biggest contributor to 496 billion euros of rescue aid, with the German chancellor insisting in return on reforms to make Europe more competitive, the continent was divided into a rich north and weaker south. That made Merkel resented in countries such as Greece and Portugal; in Germany it created an opening for the AfD, which was founded earlier this year, to vie for its first parliamentary seats.

Germany’s benchmark DAX Index has returned 68 percent since Merkel became chancellor in November 2005, compared to a 15 percent decline in the Euro Stoxx 50. In the same period, the government bonds returned 40 percent; inflows amid the region’s crisis resulted in investors occasionally paying to hold its two-year debt.

“With the strong result for Merkel, Germans have again demonstrated their overwhelming support for pro-euro policies,” said Berenberg Bank’s Schmieding


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