Merkel's CDU Is Said to Be Primed for Snap German Vote This Year

(Bloomberg) -- Germany risks being hit with an unsettling double whammy this year, with more political upheaval coming hard on the heels of a slowdown in Europe’s powerhouse economy.

Chancellor Angela Merkel’s CDU party is bracing for a possible early general election that could be triggered if its Social Democrat coalition partner fails to reverse a slump in support and pulls out of the government, according to one official who spoke on condition of anonymity. A poor result in the European Parliament election and a state vote in Bremen at the end of May could be the final straw, people familiar with the SPD’s thinking said.

“If the SPD does badly in the European election, many within the party will blame the grand coalition,” Lothar Binding, a Social Democrat party finance expert, said in an interview. The SPD reluctantly signed up to another term with Merkel, despite strong opposition from many in the party base.

The key issue for the Social Democrats is raising their profile in the government to try to lift their support from the current historically low level of around 15 percent, according to Carsten Brzeski, chief economist at ING Diba. A general election is the likely outcome, although Merkel -- whose CDU/CSU bloc is stable at around 30 percent -- could continue to rule in a minority government, he said. A new coalition with the Greens and Free Democrats is a less probable scenario.

“The big reckoning will come with the European election,” Brzeski said. “Then the debate about the grand coalition will be unleashed.”

Tension within the government is already evident in the latest wrangling over how to respond to the slowdown. The economy shrank in the third quarter of 2018 and Germany may have entered a technical recession with another contraction in the final three months of the year, latest data indicate.

With another hefty budget surplus in the bank for 2018, Finance Minister Olaf Scholz -- a possible SPD chancellor candidate -- has raised the possibility of easing the tax burden on companies if a slowdown takes hold. By contrast, the CDU wants to use the financial leeway to head off a slump, its new chairwoman, Annegret Kramp-Karrenbauer said on Monday.

“When the finance minister has said that he sees room for tax cuts if economic growth cools then we say very clearly that the tax cuts should be made to prevent a cooling of growth happening at all,” Kramp-Karrenbauer told Welt TV. “This must be discussed in the coalition.”

Taking Stock

Kramp-Karrenbauer reiterated the CDU’s proposal to completely do away with the “Soli” -- a levy to help finance German reunification. The coalition agreement foresees scrapping the tax for everyone except the top-earning 10 percent by 2021.

“We have made our decision on that, the Social Democrats have a different position,” Kramp-Karrenbauer said. “In that sense, it will remain an issue within the coalition.”

Should the SPD stay in government beyond May, the next test will be in the fall when the party plans to take stock of the coalition, halfway through the legislative period. That would coincide with state elections in three eastern regions: Saxony and Brandenburg at the beginning of September and Thuringia at the end of October.

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