The grand coalition of the Chancellor Angela Merkel’s center-right CDU/CSU and the center-left SPD has been troubled by internal disagreements, but there is little chance that either the Merkel’s bloc or the Social Democrats might force an early election. The results of state elections held since the government was formed after the 2013 elections have highlighted a growing tide of euroskepticiscm.

This trend is fueled by resentment over Germany’s outsized financial burden involving the bailing out the debt-crippled states of Europe.

The AfD won double-digit seat totals in its maiden elections in Saxony, Brandenburg, and Thuringia last year, and took eight seats at state elections held in Hamburg in February 2015. State-by-state analysis suggests that AfD is appealing to voters from both sides of the political spectrum, inflicting the most damage on whichever side was already weaker in a given state.

On that basis, neither the CDU nor the SPD can afford to ignore the AfD, a factor that is likely to increase friction between the coalition partners as they attempt to shore up their respective bases of support. Such considerations are clearly at play in a renewed debate over the minimum wage. The CDU/CSU bloc’s demands for amendments to the legislation are being staunchly resisted by the Labor and Social Affairs Minister Andrea Nahles, a member of the SPD, although some minor tweaking aimed at streamlining administration of the law is likely.

In The Spotlight

Among other items on the agenda are changes to banking rules, as required to comply with the EU’s Bank Recovery and Resolution Directive. An expected amendment that puts senior bondholders on the same level with unsecured creditors in terms of obtaining repayment in the event of a bank failure is unlikely to have a significant impact on the investment climate, assuming similar rules will apply across Europe.

A bigger immediate concern is the risk of economic instability in the event of Greece’s forced exit from the euro zone.

German officials insist that adequate protections have been put in place to limit the risks associated with a Greek default, and the fact that credit-related costs for other indebted euro zone members have held fairly steady, even as the outlook for a successful resolution of Greece’s crisis has dimmed, indicates that investors are confident on that score.

Nevertheless, the risk of contagion can hardly be ruled out, in which case the German economy would suffer along with the rest.


The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.

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