German Parties Reach Grand Coalition Deal

After a month of negotiations and two days of post-deadline delays, what UBS’ economist Paul Donovan has dubbed the “world’s most tedious political crisis” is finally over and on Wednesday morning, Germany reached a grand coalition, as news broke that Angela Merkel’s conservatives block reached a deal with the the Social Democratic SPD on forming a new government, ending a deadlock that gripped Germany since inconclusive elections last September.

“Tired but happy,” SPD leaders said in a message to party members. “We have an agreement! Finally.”

According to the FT, talks between the SPD and CDU/CSU were dogged for weeks by disagreements over health and labour policy. The SPD wanted a crackdown on short-term contracts, and also wide-ranging reform of Germany’s health system — though it backed away from an earlier demand to effectively phase out private health insurance.

As a result of the compromise, the Social Democrats will take the finance and foreign ministries in a future grand coalition government – with SPD’s Olaf Scholz, the popular mayor of Hamburg, set to become Germany’s all important finance minister, giving the leftist party a critical role in shaping Berlin’s policy on Europe over the next four years.

Scholz’ appointment is a coup for the SPD and marks a major concession by Merkel, long seen as the sole architect of German policy on the EU. As the FT notes, the ministry was previously a Christian Democrat bastion, and is synonymous in many people’s minds with the inimitable Wolfgang Schäuble, who was Europe’s most powerful finance minister before moving on to become Bundestag speaker last December.

Now the ministry will be run by a party that has called for the creation of a “United States of Europe” by 2025 and has enthusiastically welcomed Emmanuel Macron’s plans for deepening EU integration.

In addition to running German finances, the SPD was also granted the crucial Labour and Foreign ministries, and was also granted the family, justice and environment ministries.

On the other side, Horst Seehofer, leader of the CSU, the Bavarian sister party of Ms Merkel’s CDU, will head up an expanded interior ministry, which will also take responsibility for the construction industry and a new “homeland” department. The CSU will also continue to run an expanded transport ministry and the international development ministry. Merkel’s bloc will also get the economic and defense ministries according to Bild.

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The reason for the dramatic concessions is that Merkel was under enormous pressure to indulge the Social Democrats in order to win them round to another grand coalition; the alternative was a new election and potentially the end of Merkel’s political career.

After her earlier attempt to form a coalition with the greens and liberals failed in November, an alliance with the SPD was her only chance of staying in power for a fourth term as chancellor.

Meanwhile, there is still no certainty that a grand coalition will be formed. The coalition deal must now be put to the SPD’s 460,000 members, many of whom are fiercely opposed to propping up Ms Merkel for another four years. Additionally, there is also deep distrust of Martin Schulz, the SPD leader, who vehemently rejected the idea of a grand coalition in the immediate aftermath of the election but then changed his mind.

In that regard, moments ago Suddeutsche Zeitung reported that Schulz is said to step down as SPD head.

In recent weeks, the SPD’s youth wing has been waging a noisy No campaign and urging anyone opposed to another coalition with the conservatives to join the SPD and vote it down in the members’ referendum.