R2G Coalition Short Of Majority Means Broad Policy Continuity Ahead

Yesterday's federal election in Germany delivered a major blow to the centre-right Christian Democratic Union (CDU), which received its lowest vote share since the Second World War. The centre-left Social Democratic Party (SPD) emerged as the largest party, with its chancellor candidate Olaf Scholz stating that his party has the mandate to seek to form a coalition gov't.

• However, the German constitution does not mandate the president to provide a mandate to the largest party in the Bundestag, meaning that the CDU's Armin Laschet could also seek to form a gov't.
• Given that coalition talks are likely to drag on for some time, with a number of options available to party leadersthe major initial impact for markets is that the 'R2G' coalition between the SPD, Greens, and Die Linke - which could have seen policy shift sharply to the left - sits five seats short of a majority and therefore unable to govern.
• With all the overhang and leveling seats in the Bundestag awarded, the total number of seats in the chamber stands at 735, up from 709 in the previous parliament. As such, 368 seats will be required to form a majority gov't. The SPD, Greens and Die Linke have a combined total of 363.
• With a R2G coalition out of the running, all the other possibilities (traffic light, Jamaica, Kenya, Grand Coalition, Germany coalition) sit around the political mainstream, with little impact of a major change in policy stance towards Germany's fiscal outlook, stance on the eurozone, or foreign policy from any of these coalition combinations.