While the world is closely watching the US election, Germany, Europe's largest economy, is entering a critical juncture of political turmoil.
Due to the ongoing stalemate in the 2025 fiscal budget, which is expected to be finalized in mid November, there are special concerns about whether the Scholz coalition government will face significant changes in the next two weeks.
Are there increasing signs of 'disbandment'?
As a background, the current German federal government is composed of a coalition of three major political parties. In the current 733 seats in the German Bundestag, the Social Democratic Party led by Scholz holds 207 seats, the Green Party led by Vice Chancellor and Minister of Economy and Climate Protection Habeck holds 117 seats, and the Free Democratic Party represented by Finance Minister Lindner holds 91 seats.
Faced with a funding gap of billions of euros in the budget, the coalition government has been arguing for months. Faced with the approaching deadline, the divisions among the three major parties have increased instead of decreased, adding to the suspicion of a "collapse" of the alliance.
Local media reported that before the regular meeting of the alliance on Wednesday, representatives from the three parties held talks on Sunday evening and early Monday. This news has also intensified speculation about whether the alliance will dissolve this week.
ING's global macro head, Carsten Brzewski, wrote in a report on Monday: "German politics seems to have turned into a 'slow motion train collision'. The German government has just entered a new phase of a slowly burning political crisis, which may be the final step before the ruling coalition collapses
What's even more interesting is that Holger Schmieding, Chief Economist of Berenberg Bank, pointed out that the three major parties are now behaving as if "they are preparing for an immediate competition with each other".
For example, German Chancellor Scholz held a meeting with industry leaders last week, but did not invite partners from the ruling coalition. This situation has also led the German Liberal Democratic Party to announce that it will hold an economic leaders' summit led by Finance Minister Lindner this Tuesday, and will not invite the Social Democratic Party to attend.
At the same time, Finance Minister Lindner proposed a plan to boost the German economy last Friday, but was criticized by ruling coalition partners.
Morgan Stanley's Eurozone economist Greg Fuzci stated in a report on Monday that the proposal itself appears to be a serious analysis of Germany's problems and an attempt to propose solutions, but it opposes the fundamental positions of the Social Democratic Party and the Green Party, making it difficult for them to accept.
Brzewski believes that conflicting opinions in the article may not necessarily be a problem, but the tone in the wording "shows how cold the atmosphere between alliance partners has become".
Lindner stated in an interview last Sunday that he believes these issues will be resolved, while emphasizing that it is primarily the responsibility of the governing partners. But he avoided a key question, whether the German Liberal Democratic Party is prepared to leave the ruling coalition if his economic proposal does not receive support from allies.
Assumption: How the German coalition government disbanded
Schmieding stated that besides the ruling coalition finding a compromise solution, there may be several other situations that could change the composition of the German government. One possibility is that the Liberal Democratic Party itself withdrew from the alliance, and another possibility is that Scholz was provoked and demanded that they leave. If this happens, the Social Democratic Green Party minority government led by Scholz may face early elections next year.
The problem is that the core reason currently supporting the three companies to "continue to live together" is that the potential election situation is very unfavorable. The Liberal Democratic Party may only receive 3% of the votes in the election, which is not even enough to allocate 5% of the votes required for proportional seats. The Social Democratic Party and the Green Party are also expected to lose their seats, while the opposition Christian Democratic Union is expected to return to power.
Brzewski also explained that the Scholz minority government can actually hold on until the scheduled election day later in 2025, and even if the Liberal Democratic Party withdraws from the alliance, it may not necessarily trigger early elections. According to the German Constitution, the Federal President can only call elections in advance if the Chancellor loses a vote of no confidence in parliament.
But Brzewski also emphasized that the prospects for a German coalition government are already quite weak. He wrote, "Overall, we believe that the risk of the German coalition government falling apart is now higher than ever before. Even the potential geopolitical uncertainty brought about by the US election no longer seems to be a guarantee of maintaining government unity