German 'grand coalition' would be good for Europe: analysts

23rd September 2013, Comments 0 comments

Germany will not change course on Europe following weekend elections, victorious Chancellor Angela Merkel said Monday, even as analysts suggested she could adopt a slightly softer tone towards austerity-hit partners.

In a stunning election triumph, Merkel and her conservatives scored their best result in 23 years in general elections Sunday, winning 41.5 percent of the votes, not far off an absolute majority.

But Merkel must now start the process of haggling with potential partners to find a governing alliance for Europe's biggest economy.

And a so-called "grand coalition" with the Social Democratic Party (SPD) -- a power-sharing arrangement Merkel used in her first term between 2005 and 2009 -- is looking the most likely outcome.

Asked by reporters at her Christian Democratic Union (CDU) headquarters whether Germany would now be more flexible in its demands for structural reforms and balanced budgets from European partners, she responded: "Our course on European policy will not change."

"We must come out of the crisis stronger," she added.

Germany had been considered the "sick man of Europe" around a decade ago but is now "an anchor of stability" in the EU.

"The others can also achieve that," said Merkel, who has insisted on stringent reforms in return for bailouts in debt-wracked eurozone countries.

With regard to a possible coalition with the SPD, Merkel said: "We are open for discussions.

"I had a first contact with the SPD chairman who understandably asked that the SPD first hold its party meeting on Friday," she said.

But she added she did not rule out talks on a potential coalition with the ecologist Greens.

Analysts believe that a centre-right, centre-left coalition between the CDU, its Bavarian allies the CSU and the SPD will herald no major policy changes, particularly with regard to Europe.

"Most Germans want a grand coalition led by Merkel according to opinion polls," said Berenberg Bank chief economist Holger Schmieding.

"The impact on policy will be small, with hardly any change on the European level and a modest tilt towards a centre-left agenda at home," he said.

"Overall, the election outcome should be interpreted fairly positively: a grand coalition would have large parliamentary majorities in both houses of parliament," said analysts at Citi Research in a note to investors.

'More constructive on Europe'

UniCredit economist Andreas Rees said that "a renewed grand coalition will continue to steer a euro-friendly course".

"It could even be the case that the new government is (marginally) more constructive on Europe than before," he said.

Even with the start-up anti-euro party, the AfD, scoring 4.7 percent of the votes -- not enough to win any seats in parliament -- "the overwhelming majority of Germans remains fully committed to the European cause," Rees pointed out.

"The continuation of euro-friendly policies after the election will enable further much needed progress in European integration," he said.

Gilles Moec, co-head of European Economics Research at Deutsche Bank, said Germany's stance on Europe throughout the crisis "has been increasingly co-managed between CDU and SPD".

"In a coalition this co-management would become more formal, but the overall message from Berlin to the rest of Europe is unlikely to change," Moec told AFP.

Rating agencies Fitch and Standard & Poor's (SP) said the sovereign debt ratings of both Germany and the eurozone were likely to remain unaffected by the election outcome.

And S&P said its analysts "anticipate few, if any, material changes in the approach to the eurozone crisis if a grand coalition emerges."

Schmieding at Berenberg Bank believed that Berlin's euro policies would remain "virtually unchanged" with "no euro bonds or other serious mutualisation of debt."

Carsten Brzeski at ING DiBa similarly believed that "for the eurozone, a grand coalition would probably continue the current crisis management but with a softer hand".

"Eurobonds are unlikely but some new European investment initiatives and a soft push towards hidden burden sharing could be the result of a grand coalition," he said.

"Even a kind of redemption fund, a eurozone bank resolution fund and far-reaching integration could eventually enter the eurozone's centre stage with a grand coalition," Brzeski said.

Citi Research analysts cautioned that markets could be unnerved if coalition negotiations drag on for weeks.

"A grand coalition may also become unstable in the long-run, as the SPD will likely try to avoid the same fate as in 2005-09 when it lost substantial voter support following its participation in a Merkel-led grand coalition government," the analysts warned.

© 2013 AFP

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