The 2021 German general elections saw the Christian Democrats (CDU) lose its grip on power, as it obtained 24.1% of the vote, placing it second behind the Social Democrats (SPD), which earned 25.7%. The elections failed to produce a decisive winner, indicating the beginning of long and complicated negotiations, with both the Greens and the Free Democratic Party (FDP) positioned as crucial kingmakers. While deep disagreements continue to exist between the Greens and the FDP, the two have begun negotiations before approaching either the SPD or the CDU.
While several possible coalitions remain at play, the SPD will be the most likely leader of the next government. Yet, the highly fragmented election results suggest that coalition negotiations could take months and that Angela Merkel will likely remain chancellor at least until the Christmas period. The SPD will likely have to scale down some of its policy program if it is to partner with the FDP, but it may opt to appease its leader, Christian Lindner, by offering the position of a finance minister. While a concrete outcome of the negotiations is difficult to predict, the SPD’s likely leadership suggests that upcoming budgets will see a gradual increase in expenditures and a stronger focus on social policy, but Germany’s overall fiscal habits should remain relatively conservative. Should the SPD manage to convince its coalition partners to lift Germany’s debt break, however, the government will undertake a much more proactive fiscal expansion.
The SPD’s likely leadership will shift the tax burden to wealthier individuals and companies, and the party’s program includes a freeze on the plans to reduce the corporate tax, introduction of new luxury goods taxes, and—if the Greens enter a coalition with the SPD—tougher environmental regulations. MNCs are likely to see strengthening demand from low-income earners but an increasingly complicated operational environment that is likely to negatively affect partners’ margins.
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