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●   Annalena after Angela? The German Greens are riding high in opinion polls. They will almost certainly be part of the next German government. We see a 40% probability that Annalena Baerbock, the new face of the Greens, will succeed Angela Merkel as German chancellor after the 26 September election.

●   But would the rise of the Greens lead to a major shift in policies? Probably less so than most outside observers seem to believe. Germany often works by consensus. In response to climate change, Germany is going green anyway. The Greens’ move into office in Berlin would merely accentuate the trend.

●   The end of prudence? Not really. The Greens want to modestly ease the constitutional brake on German public debt and favour a bigger EU budget and more risk-sharing in the Eurozone. But the room for change is tightly constrained by the need for at least one coalition partner, by the veto that the CDU/CSU could wield in the upper house of parliament against major changes and by the bounds of the German constitution and the hawkish inclinations of its ultimate arbiter, the constitutional court (page 7).

●   In-depth look at German politics. In this report, we explain why the uncharismatic leader of the CDU, Armin Laschet, is still more likely (55%) than Baerbock to follow Merkel (page 3). We go through potential coalition options (pages 4-5), examine the key ideas of the major parties (pages 6, 9-11) and discuss what is at stake (page 8).

●   What really matters: The key question for Germany – and investors – is not the name of the next chancellor but the colour of the next coalition. If the ”black” CDU/CSU or the “yellow” liberal FDP are part of the next coalition, they should prevent a major turn to economically damaging policies. Apart from new faces and some sector themes, investors may not notice much of a change. Chart 1 gives our probabilities for these options. Taken together, they add up to 85%.

●   The real risk is a leftist coalition between the Greens, the SPD and the hard-left Left Party. In such a tie-up, the more radical bases of the Greens and the SPD would likely reinforce each other and prevail over the leanings of their top candidates, who are more pragmatic than their party manifestos. Reform reversals and a wave of regulations in the labour and housing markets could harm German trend growth significantly over time (page 8). This is the tail risk to watch (15%) – Chart 1.

Holger Schmieding

Chief Economist

+44 7771 920377

holger.schmieding@berenberg.com

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