No economic U-turns likely if Germany votes for coalition

No major U-turns in economic policy are expected if Germany's election Sunday ends up in a left-right "grand coalition" as is increasingly looking most likely, analysts say. Chancellor Angela Merkel's conservative Christian Democrats (CDU) and their Bavarian CSU sister party are set to win the largest share of votes, securing her a third term in office. But she is unlikely to secure an outright majority and will therefore have to share power with another party. Given the fears her current coalition partners, the pro-business Free Democrats (FDP), will not win enough votes to retain any seats in parliament, she could be forced to team up with her Social Democrat rivals, the SPD, instead. Merkel might be compelled therefore to make concessions or face political stalemate, analysts warned, saying that on Europe, no big change of course was expected. Merkel headed a grand coalition during her first term in 2005-2009. Indeed, her current SPD challenger, Peer Steinbrueck, was her finance minister back then. Berenberg Bank chief economist Holger Schmieding put the probability of such a coalition this time round at 50 percent and warned "things could get messy." "At first glance, it may not matter much. Most policies would not change much," Schmieding said. Nevertheless, the coalition negotiations will likely prove long and laborious and that could, temporarily at least, put the brakes on investment and private consumption, he said. A particular bone of contention could be the issue of a national minimum wage. Steinbrueck is calling for an umbrella minimum wage of 8.50 euros ($11.50) per hour. Merkel and her government reject this, arguing it is up to employers and unions to reach such agreements on a sector-by-sector and regional basis. "A semi-uniform national minimum wage would raise the structural rate of unemployment," Schmieding said. Coalition negotiations could also prove sticky on tax policy. Analysts at Equinet Bank said they would expect to see the CDU/CSU parties making concessions on "less important tax aspects", but that key matters such as a unified health insurance would remain untouched. Schmieding at Berenberg Bank warned that if Merkel's conservatives make concessions by raising income tax rates at the top of the pay scale, that "would make life harder for entrepreneurs." "The impact on the short-term business cycle would be negligible. But over time, Germany could lose its current position as one of the best places to do business in Europe. That would be costly," he said. Deutsche Bank analysts pointed out that during the previous left-right grand coalition, a large majority in the lower house of parliament, or Bundestag, and the two parties' combined popular support allowed Merkel to implement sometimes unpopular reforms. "It became apparent however that although a grand coalition enables reforms, it can also immobilize any government," they argued. One key policy area where little progress was made was healthcare. "In this case, the grand coalition only adopted a policy of the lowest common denominator," the analysts said. On European policies, analysts agreed that no major changes were likely. Marcel Fratzscher, president of the DIW economic think tank, said: "No matter which coalition forms the next federal government, there will not be any great differences. "When you look at the four large parties in parliament, in government but also in opposition, there are really only very small differences in terms of European policies. We will have the same European policies as now," Fratzscher said. Even when the SPD was relegated to the opposition benches during Merkel's second term, the SPD behaved "quite responsibly during the euro crisis," said Schmieding. "It backed all major decisions on putting German taxpayer money at risk to shore up troubled countries on the euro periphery. Despite occasionally toying with ideas such as euro bonds or a debt redemption fund, the SPD never pressed hard for such ideas," he added.