CDU/SPD Coalition Bad News for Economy

The possibility of Germany being governed by a "grand coalition" after the Sept. 18 federal elections has put economists on alert. A marriage of convenience between the Social Democrats and the Christian Democratic Union, which has seen support dip in the past few weeks, could spell further trouble for Germany's already ailing economy, according to analysts.

The coupling of the country's two biggest parties, with the conservatives as senior partner and their leader Angela Merkel as chancellor, could see the end of reforms to labor laws which are seen as crucial for spurring growth. In the situation where the CDU leads the way, the SPD would probably block measures that might upset their left-wing supporters.

"The labor market is always the key when it comes to economic reform in Germany," said Jörg Krämer, chief economist at HVB Group in Munich, in an interview with Reuters. "A grand coalition would make the implementation of necessary reforms even more unlikely."

CDU wants to loosen rigid labor market rules

Economists shuddered when the CDU and its sister party, the Christian Social Union, revealed that loosening Germany's rigid labor market rules and boosting employment were key points in their election party program.

Together with the liberal Free Democrats (FDP), the CDU's traditional partners in government, the conservatives have said they want to make it easier for companies to hire and fire workers, reduce the burden of non-wage labor costs on employers and introduce direct subsidies to low-wage employees to help people into work.

While a slump in popularity has raised the possibility of an SPD/CDU coalition in government come September, the more likely outcome of the election would be a CDU/CSU/FDP collaboration, despite a slip in support for such a government to a combined 50 percent in recent weeks. Recent polls have shown a majority of Germans favor a grand coalition.

Germany's first, and only government coaltion of the CDU/CSU and SPD ruled during the late 1960s.

Schröder economic promises haunting SPD

A grand coalition could be the best the floundering SPD can hope for as the party's record in dealing with Germany's economic malaise looks set to topple Gerhard Schröder from power. Schröder himself sowed the seeds of the pressure his Socialist Democrats are currently feeling by pledging to cut unemployment to below 3.5 million when he was elected in 1998, but he then presided over a rise in the jobless total to a postwar record above five million earlier this year.

Since the SDP came to power seven years ago, Germany's economy -- the largest in Europe -- has also faltered alarmingly. The government expects gross domestic product (GDP) to expand by just one percent this year and 1.6 percent in 2006.

Despite the economic factors that have turned much of the populace against the chancellor and his party, analysts have praised Schröder for making a start to freeing up Germany's labor market.

Shift to the left threatens further reforms

However, in an attempt to placate the public which seems to prefer quick solutions to longer, more painful and lasting reforms, the election platforms of his SPD and their Green party coalition partner have shifted considerably to the left, a move that makes further reform unlikely.

In the event of a grand coalition it is most likely that the SPD would block CDU/CSU initiatives regarding labor legislation, according to Jürgen Michels, an economist at Citigroup, in an interview with Reuters. "A grand coalition probably would implement less on the labor market reforms and this would be less positive for the long-term growth outlook," Michels said.

The SDP could also block attempts to ease dismissal rules as well as any initiative to make Germany's collective wage-bargaining system more flexible by allowing employers to negotiate with workers at the company level.

"Many companies do not hire people because they do not know how to lay them off in case they get into trouble," Michels added. "Easing the law on dismissal would make the German labor market more flexible and this flexibility probably would create more jobs in the long run."