The German electorate is fed up with its government. Since Gerhard Schröder's left-leaning SPD–Green coalition came to power seven years ago, the German economy has stagnated, growing at less than 1% a year in three of the past four years. The European Commission is now forecasting just 0.8% real GDP growth this year, the lowest rate in the 25-member EU. After disastrous defeats in elections at the level of the Länder, the states of the German federation, which left the governing coalition in power only at the centre, Schröder has gambled on a snap election. But it is not going to work. The conservative CDU, in company with the Bavarian CSU, continues to ride high in the polls. A Merkel-led centre-right coalition, including the liberal FDP, looks set to win on September 18.
I reckon a centre-right coalition would be the best result for German financial assets and the economy. The CDU–CSU manifesto aims to implement an immediate cut in payroll costs for employers to boost employment. It pledges to cut, from 2007, corporation and personal income tax from 25% to 22%. Under CSU pressure, it also aims to rein in the widening budget deficit presided over by the SPD by immediately raising value-added tax from 16% to 18%, some of which will go straight to helping regional government finances as well as the federal deficit.