Germany's ruling coalition government is hanging by a thread, potentially having major implications on the country's spending habits and wider reforms across the continent.
On Saturday, Chancellor Angela Merkel's junior coalition party — the Social Democrats — elected new leaders in a vote that will be confirmed later this week. Norbert Walter-Borjans and Saskia Esken, who ran on a joint ticket, want to renegotiate some of the terms of the ruling agreement with Merkel's conservative party, the Christian Democratic Union of Germany .
"The new leaders are likely to challenge the status quo in the federal government. In particular, Esken has positioned herself in favor of an exit from the grand coalition," Ricardo Garcia, chief euro zone economist at UBS, said in a note to clients Monday.is set to open the way for tough talks between the two partners. The new socialist leadership has said they would like to see more ambitious plans on climate change, higher minimum wages, as well as different fiscal rules.
"We don't think that all of these will be acceptable to the CDU/CSU, in particular to its more conservative members," Garcia added.. Its fiscal prudency respects the German constitution, where a "debt brake" law basically forces its leaders to present budgets without structural deficits. The euro zone powerhouse saw a record budget surplus of 58 billion euros in 2018.However, lower economic growth has sparked calls for the German government to change tack.
The SPD's spending policies "put them completely at odds with the CDU/CSU and at the moment it seems a bit of a struggle to see a middle ground being found," analysts at Rabobank said in an email Monday morning.The current political landscape makes it difficult to predict what could unfold. On the one hand, the Socialist party has seen lower public support, leading some analysts to argue that the SPD could be about to take a more assertive role in the ruling coalition.
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