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Releasing Germany's fiscal straightjacket



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RELEASING GERMANY'S FISCAL STRAIGHTJACKET

2024 has been the year of the vote, with countries housing half of the world's population having held elections this year.

And while 2025 looks set to be quieter on that front, Germany, the euro zone's largest economy, is set to head to the polls in February, following the collapse of the coalition and this week's no confidence vote.

Polls show the CDU/CSU likely winning the most seats, but falling short of a majority. The FDP and the left party (Die Linke) are currently polling below the 5% threshold to enter parliament.

The major parties released their manifestos on Tuesday, unveiling their plans to revive Germany's economy, which looks set to shrink for the second straight year.

"Given the various spending proposals, and in particular the substantial public investment needs, we believe some fiscal policy easing, perhaps in the context of a reform of the debt brake, will be one of the themes of a new government," UBS says.

"While positions on this topic differ across party lines, key institutions such as the Bundesbank and the Council of Economic Advisors advocate an easing of the fiscal straightjacket."

Germany needs a two-thirds parliamentary majority for constitutional reform of the debt brake, so markets are focused on whether opposition parties will have enough seats for a "blocking minority" to oppose a constitutional amendment, according to Goldman Sachs.

"The polls suggest that a blocking minority is currently falling short of the required seats, unless Die Linke joins the group," GS says.

"Our probability analysis suggests that the odds of a blocking minority without Die Linke is 33%. The odds rise to 68% conditional on the FDP entering parliament, highlighting the importance of monitoring whether the FDP clears the 5% hurdle," they add.


(Samuel Indyk)

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EARLIER LIVE MARKETS POSTS

DEALS THE DRIVING FORCE CLICK HERE

EUROPE BEFORE THE BELL: DON'T THEY KNOW ITS CHRISTMASTIME? CLICK HERE

MORNING BID: FED LOOMS AND EUROPE GETS INFLATION DATACLICK HERE


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