German vote dilutes hopes for economic reform

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An election campaign billboard, featuring the top chancellor candidates, Olaf Scholz of the Social Democratic Party (SPD) and Armin Laschet of the Christian Democratic Union (CDU), is pictured on a street in Berlin, in Germany, September 23, 2021.

LONDON, September 26 (Reuters Breakingviews) – Nothing happens in Europe without German leadership, according to an old saying. This makes Sunday’s tight election in the region’s largest economy particularly puzzling. Social Democrats (SPD) Olaf Scholz and his center-right rival Armin Laschet will each court the fiscally conservative Free Democrats (FDP) in an attempt to form a government. This may dash hopes for big green investments and more flexible fiscal rules in the European Union.

Scholz is the ostensible winner based on early projections which give the SPD 25.5% of the vote. But the election is close enough that Laschet’s Christian-Democratic / CSU bloc, with 24.5%, is also looking to form a coalition government. To have a majority in parliament, the two men will probably need the support of the Greens and the FDP, which came third and fourth respectively. This gives these two small parties the opportunity to extract prominent political engagements and jobs.

Things could get particularly difficult in talks with the FDP, whose leader Christian Lindner wants to reduce Germany’s national debt to 60% of GDP from around 70%. Achieving Lindner’s goal will likely prove incompatible with Scholz’s ambition to invest more in green technologies and public infrastructure. FDP manifesto proposes that Germany be carbon neutral by 2050, five years after a more ambitious goal shared by the SPD and the Greens, and opposes setting a firm deadline for registration cars with combustion engines.

And the FDP chief’s insistence on debt reduction at a time when many large eurozone countries have much higher budget deficits and debt burdens relative to GDP highlights a different approach to Scholz on the European Union. The FDP leader sees the issuance of common debt in the era of the pandemic as an aberration and favors the rapid reestablishment of the EU’s fiscal rules rather than discussions on how to make them more flexible.

Lindner’s relatively low projected vote share of around 12% should limit his influence over any future government agenda. But the FDP is used to playing hard, having moved away from coalition negotiations after the 2017 elections. The SPD and the CDU / CSU bloc will court Lindner this time around. This gives it leverage and will dilute any lingering hopes for major economic reforms.

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NEWS CONTEXT

– The German Social Democrats (SPD) narrowly came out on top in the national elections on September 26, according to the projected results of broadcaster ARD.

– The party, whose chancellor candidate is Olaf Scholz, was on track to collect 25.5% of the vote at 17:59 GMT, ahead of 24.5% for the conservative Christian-Democrat / CSU bloc.

– Scholz and his conservative opponent, Armin Laschet, have each said they could lead the next government.

– The tight result means lengthy coalition talks will follow before a new government takes office, likely involving the Greens and the Free Liberal Democrats (FDP), who came in third and fourth respectively, according to the projection by the ARD.

Editing by Swaha Pattanaik and Karen Kwok

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