German coalition unlikely to produce fiscal policy shift, says Fitch

Fitch Ratings says in its initial reaction to the German parliamentary elections that any coalition agreement on fiscal policy is likely to be set with reference to existing targets.

In the run up to the election, the CDU/CSU and the opposition SPD differed in some details on tax and spending policy, but both remained bound by constitutional debt limits and committed to existing objectives. Having beaten its general government fiscal balance target last year, and met its federal structural deficit target well ahead of the 2016 deadline, Germany has more fiscal space to absorb potential shocks to the public finances than some other ‘AAA’ rated sovereigns with high debt-to-GDP ratios.

Exceeding fiscal targets or meeting them early demonstrates fiscal discipline and supports our expectation that debt growth has peaked and the ratio will drop to closer to 70% of GDP by 2017

While debt-to-GDP is substantially higher than the ‘AAA’ category median, other factors supporting Germany’s sovereign rating include: the fiscal financing flexibility it enjoys as the eurozone’s pre-eminent benchmark bond issuer; its high value-added economy; and its strong net international investment position.

A coalition of the CDU/CSU and SPD is the most likely and would have a majority in both the Bundestag and Bundesrat, but may be harder to negotiate because of the SPD’s poor election result in 2009 after a coalition with Merkel’s first government in 2005. This means the coalition is likely to take a long time to form; the 2005 CDU and SPD coalition took 65 days to form.


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