Germany: Why Sunday’s state elections matter

Together with the economic slowdown, declining support for the governing coalition may (or may not) open the way to greater fiscal stimulus.

The results of Sunday’s state elections in Saxony and Brandenburg will be scrutinised closely. A heavy CDU or SPD defeat would send shock waves through Berlin.

Germany’s slowdown has raised expectations for further fiscal stimulus. The fragile situation of the two mainstream parties makes decision-making more complicated.

Nevertheless, at least the debate among officials has started and a gradual approach might emerge in autumn. Notably, there seems to be growing support to agree on measures to tackle climate change. The 2020 budget debate in September may also offer further clues as to whether pressure is really growing or not.

Beyond the political situation, there is also the official assessment of the health of the economy. The fact that the industrial slump has started to leave some marks on domestic demand should at least start to ring some alarm bells in the government.

An external shock such as a no-deal Brexit or US tariffs on EU cars could also prompt a policy response. A political crisis leading to snap elections and a change of government could also be a catalyst for further fiscal stimulus.

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