Investing.com -- As Germany prepares for federal elections on February 23, coalition-building will be the key factor in determining the next government. Under the country’s proportional representation system, no single party is expected to govern alone.
Citing polls data, UBS strategists said that “the center-right Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU), will likely head the next government with the backing of around 30% of voters.”
Despite losing some ground in recent weeks, the CDU/CSU bloc, collectively referred to as the Union, holds a ten-percentage-point lead over the far-right Alternative for Germany (AfD), which is polling in second place.
The Social Democratic Party (SPD) is currently in third with 16% of the vote, followed closely by the Greens at 14%.
According to UBS, “the most plausible scenarios are for the Union to form a government with either the SPD or the Greens,” with a coalition with the SPD considered more likely due to historical precedent. Moreover, CSU leader Markus Söder has explicitly campaigned on excluding the Greens from government.
However, the election results may complicate coalition negotiations. UBS warns that a combined vote share of 46% for the Union and the SPD “would be the weakest result achieved by any coalition since reunification,” making the partnership highly sensitive to any further loss of support.
Should this happen, other options may need to be explored, such as the inclusion of the liberal Free Democratic Party (FDP) in a “Jamaica” coalition with the Union and the Greens. However, UBS points out that “a coalition spanning more than two party blocs could make it more challenging to advance a decisive policy agenda.”
One certainty is the exclusion of the AfD from any coalition. UBS notes that “all centrist parties have ruled out” collaboration with the far-right party, a stance viewed as credible given the lack of cooperation at any level of government thus far. Despite this, the AfD’s rise could influence policy positions, particularly for the Union, which has adopted a tougher stance on immigration to counter voter drift toward the AfD.
“With the economic outlook topping the list of voters’ concerns, the pressure on the next government to turn around the economy’s fortunes will be high,” UBS noted.
“Hence, the AfD’s rise could make it more likely that the next government agrees on political compromises to support the economy—for example, when it comes to reforming the debt brake to ease budgetary pressures,” it added.
The next government will likely face significant challenges, particularly in addressing Germany’s sluggish economic growth. UBS highlights that the new administration will need to implement structural reforms to counter demographic headwinds and underinvestment.
While a decisive reform agenda could boost confidence and support the economy, UBS cautions that “a coalition emerges that—similar to its predecessor—quickly loses steam amid internal strife” is a possible risk.
At this point, the most likely scenario appears to be a mix of those two cases, the bank added.