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Germany: Expected Election Result not a Threat to the Business Landscape

March 28th, 2017

As one of the founding members of the European Union (EU), the result of the German national elections to be held in September 2017 will hold significant importance not only for the country but for the European Union (EU) as a whole. Major polling trends reveal that Chancellor Angela Merkel’s liberal-conservative party, the Christlich-Demokratische Union International (CDU), is leading as of 27th February 2017, followed by the centre-left Social Democratic Party (SDP). However, CDU’s popularity has come into question, with the results of the regional elections demonstrating SDP as the popular party. If the 2017 German national elections lead to a coalition of the CDU or SDP, the German business environment won’t witness much change owing to the more or less similar ideological construct of the two parties. However, the anti-European Union (EU) and anti-immigrant Alternative for Germany (AfD) party’s popularity has risen as well, with the party winning seats, for the very first time, in regional elections which were previously the strongholds of CDU. Hence, the potential presence of AfD in a coalition deal can cause challenges for the German Business environment, in terms of bringing forth anti-businesses policies.

SWOT analysis of Germany's business dynamics landscape

Germany’s current business environment is top ranked and is led by progressive state regulation

  • Germany’s ranking at 17th out of 178 nations in the Index of Economic Freedom 2016 is in the top five regionally, owing to high levels of business, investment and trade freedom. Since 2012, this ranking has consistently improved, partly owing to the increase in economic freedom associated with the labour market;
  • The government actively seeks FDI, with the country allowing free flow of capital not only with the countries in the European Union (EU), but also with the USA. While the transparent legal and regulatory system has made the country an attractive destination for FDI, there are restrictions to foreign investment in areas related to foreign policy, foreign exchange and national security. Once established, a foreign entity is subjected to the same regulation as its domestic counterpart;
  • The 2016 Ease of Doing Business (Doing Business) ranking for Germany at 15th out of 189 countries placed it in the top ten regionally; lower than the UK, but higher than France and the Netherlands, signalling a relatively competitive business environment. The nation’s 2016 ranking is higher than in 2010 owing to a rise in the strength of minority investor protection. However, in comparison to developed nations, Germany lags behind in the relative ease of starting a business. This can be owed to the existence of a relatively large amount of procedures and days involved in starting a business coupled with the high cost of registration involved for a new firm;
  • Germany has been successful in combating corruption, as represented by its ranking in the top ten Western European nations in the Corruptions Perceptions Index in 2015. The rise in this rank from 2010 to 2015 reflects the country’s focus on completely eradicating corruption from the economy. Corruption scandals are rare, but if they do occur, are mainly related to firms. An example is the 2008 bribery scandal of a German firm Siemens, causing the firm to pay US$1.6 billion as damages to various European and US authorities. Hence in order to increase its Corruption Perceptions ranking to match that of Netherlands for 2015, Germany will have to focus on reducing corporate corruption;
  • Germany’s 2014 Regulatory Quality Ranking is among the top 15 globally, owing to effective regulation and a legal system which is conducive to business growth. However it is less favourable than the UK, as the UK has more robust policies in areas such as protecting minority investors.

The German business environment will not witness much change due to the electionoutcome, but rising right wing ideology can be problematic

The projected election outcome as of 27th of February 2017 clearly indicates the lead of CDU and affiliates with a 34.6% of total votes (trade sources), followed narrowly by the SPD with 24.3% of total votes (industry sources), whose popularity has witnessed the greatest surge among all the parties in the country. Since none of the parties are predicted to have an absolute majority, there is a strong likelihood of coalition between SPD and CDU, SPD and other parties and CDU and other parties, dependent on which party has the largest share of votes. However, results of the regional elections in the country have been disappointing for Merkel’s CDU, with the party losing seats, indicating loss in popularity post the German Christmas market attack in December 2016 and the significant influx of immigrants in the country. Hence, it’s predicted that a coalition maybe on the cards for Germany post the September 2017 elections, but there is a high chance, owing to rising popularity, that SPD will be leading the coalition, as opposed to CDU, which was the case previously.

Since both the SPD and CDU only differ in a few ways in case of political ideology and have had close political ties in the past, the German business environment won’t undergo a major change post-elections and is still expected to be one of the best in the world if either party comes to power and forms a coalition. Centre-left SPD has been pro increasing taxes on business and is focused on reduction in personal income taxes, which although implies a more difficult tax environment for firms, but a higher consumption and hence a higher demand for goods and services may offset the rise in taxes on businesses. CDU, on the other hand, is focused on reducing regulations and stricter integration of the asylum seekers in the German community, despite not changing its ‘open door’ policy for refugees. The positive outlook towards the influx of refugees by the CDU, who majorly belong to the age group of 18-24 year olds (trade sources), is much needed given that the total number of 65 year old and above would account for 26.1% of population in 2030, indicating asignificant burden on public finances and lack of workers in the future.

The only threat to the German business environment stemming from the political scenario in the country can come from the rising popularity of the far-right AfD party, projected to be the country’s third largest political party, which obtained 11.6% of the total votes in the latest poll (trade sources). The AfD has already become popular in regional polls, obtaining a 20.9% vote share (much more than CDU) in Merkel’s home turf and CDU’s previous stronghold, Mecklenburg-Vorpommern region in September 2016. Hence, if AfD grows even more popular until September 2017 and enters the coalition post the election outcome, there is a high probability that they may push for laws that can be detrimental to the German business environment, such as Germany leaving the EU. At the very least, the presence of this party at the centre might lead to blocking of laws which can improve the German economy, such as the eradication of federal funding to neo-Nazi parties, whose policies are not pro-business. Hence, although the German national elections of 2017 are majorly predicted to not deteriorate the business landscape of the country, the threat posed by far-right extremist parties is growing and can alter the business environment in the future if left unchecked.

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Oru Mohiuddin

Oru Mohiuddin is a Strategy Analyst for Euromonitor International. She has a Master in International Development from University of Birmingham and has been working in the company since 2007. Professional interests include tracking beauty trends with a particular focus on colour cosmetics, hair care and evaluating company performance.

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