BERLIN (Reuters) – Germany could face an extended period of policy gridlock and a greater risk of political instability if Chancellor Angela Merkel is forced into another coalition with her leftist rivals after an election this month.
Although the “grand coalition” she has presided over for the past four years has proved more effective and harmonious than many expected, political analysts and economists fear a new right-left partnership would be a very different beast.
Their chief concern is that Merkel’s conservatives and the Social Democrats (SPD) have exhausted the big policy domains where compromise is possible.
But there is also a worry that a second grand coalition would be more prone to infighting and at risk of premature collapse — in part because it would leave a simmering struggle between the SPD’s left and right wings unresolved.
This could hamper Germany just as it emerges from its deepest recession since World War Two and tries to tackle key policy challenges, from a soaring deficit to a fragile, overcrowded banking sector.
“We think another grand coalition would be more of a caretaker government, and would lead to stagnation across all major policy fields,” said Dirk Schumacher, an economist at Goldman Sachs in Frankfurt.
“We would expect to see a lot of infighting and it is unclear that such a coalition could survive a full term in parliament.”
Polls released less than two weeks before the Sept. 27 vote show Merkel on track to seal the centre-right coalition with the Free Democrats (FDP) that eluded her in 2005 and put an end to Germany’s second grand coalition since World War Two.
Budget consolidation
But the polls also show Merkel’s margin for error is extremely small.
A dip in support for her conservatives of only a couple of percentage points could doom her plan to link up with the FDP, pursue tax relief and extend the lifespan of Germany’s nuclear power plants.
Should she fail to get her coalition of choice, the most likely alternative would be a new grand coalition, with a weakened SPD but most of Merkel’s cabinet ministers staying on in their current roles.
Over the past four years, her government tackled a reform of the healthcare system and tried to overhaul the complex ties between the federal and state governments.
It also raised the retirement age to 67 and consolidated the budget before economic stimulus packages worth 81 billion euros ($118.9 billion) sent the deficit soaring again.
The key challenge for the next government, regardless of its make-up, will be to bring down this deficit.
To do so, economists say a grand coalition would be forced to forge compromises that would probably lead to modest public spending cuts and an increase in consumer taxes from 2011, including possibly a hike in value-added tax.
Budget-neutral tweaks to income tax brackets to provide relief to low wage earners could also result, although a more ambitious overhaul of the tax system would be unlikely.
“The scope is limited but they would have to show they were capable of doing something,” said Eckart Tuchtfeld, an expert on fiscal policy at Commerzbank.
Even if fiscal compromises were reached, however, a new grand coalition could have trouble pushing legislation through the Bundesrat upper house of parliament, where the influence of smaller parties like the FDP, Greens and Left party has grown.
Thomas Mayer, chief European economist at Deutsche Bank in London, expects a new grand coalition would erode the labour market reforms put in place by former Chancellor Gerhard Schroeder, but accomplish little else.
“They have chipped away at the Schroeder reforms and that would continue,” he said. “I don’t see any new initiatives though. They would go on administering, with Merkel presiding.”
Stability worries
A more serious concern that leaders of Merkel’s Christian Democrats (CDU) have been discussing for months is the risk of a premature collapse of a new grand coalition.
Support for the SPD is hovering near record lows after four years of partnering with Merkel’s conservatives and many members of the centre-left party fear voters will continue to flee if they get into bed with her again.
Were that to occur, pressure from within the party to leave the coalition would mount, particularly if the SPD had a chance to oust Merkel by forming a three-way ruling partnership with the Greens and either the far-left Left party or FDP.
The SPD and Left party, which includes many former SPD activists, have formed coalitions in German states, but the SPD has ruled out cooperation at the national level for now — a stance which could change over time.
In private, Merkel has told party members she fears a second grand coalition would be much less stable than the first and at risk of breaking apart after a few years.
“In a second grand coalition, the SPD would be weaker and tensions in the party would mount,” said Wolfgang Nowak, head of the Alfred Herrhausen Society, a Deutsche Bank think tank. “The party’s unresolved questions of leadership and direction would be a heavy burden.”