On Sunday September 26th, all eyes were on Germany, the de-facto leader and powerhouse of the EU, as they held a historic election to replace Angela Merkel after 16 years as chancellor. While many of the exit polls had predicted a dead heat towards the finish line, the elections were destined for unpredictability from the start. Now is when the real hard part starts!

It was the tightest race in decades and for months, all pollsters could come up with was “too close to call”. Even now, after the results came in, the suspense certainly isn’t over. The Social Democrats (SPD) claimed a very narrow victory with just 25.7% of the vote, over the conservatives (Merkel’s CDU/CSU party) who suffered their worst-ever performance, at 24.1%, a nearly 9% drop since the last election. Just to highlight how close this election was, it is worth pointing out that no winning party in a German national election had ever taken less than 31% of the vote before.

Despite the tight election, SPD leader Olaf Scholz was quick to celebrate and to proclaim that the outcome represented “a very clear mandate to ensure now that we put together a good, pragmatic government for Germany.”

However, his rival, Armin Laschet, also told supporters that “we will do everything we can to form a government under the Union’s leadership, because Germany now needs a coalition for the future that modernizes our country.” Both parties are now courting the same two partners to form a coalition: the environmentalist and heavily left-leaning Greens, who came in third with 14.8%, and the Free Democrats (FPD), seen as being more business-friendly, who received 11.5% of the vote. The other option would be a “grand coalition” of the two largest parties, a recipe that has been tried in the past, but after years of dysfunction and internal frictions, there is little appetite for it. As Laschet himself put it, “everyone thinks that... this ‘grand coalition’ is not promising for the future, regardless of who is No. 1 and No. 2. We need a real new beginning.”

It’s still too early to tell, and the negotiations could take weeks or even months, but one thing is clear: the political center has collapsed in Germany, arguably the last nation in the EU that even had one. Merkel’s party might have been conservative in name only, especially when it comes to social policies, taxes, or immigration, but it did represent the last bastion of fiscal sanity (at least compared to other European governments). The nation had a longstanding commitment to “Schuldenbremse”, or the “debt brake”, and it consistently pushed the entire Union to embrace more fiscal discipline. This election is likely to put an end to all that.

Be it energy transition and “green investments” or social spending and “equality”, the new government, whatever its composition, is set to steer the country in a new direction, much more aligned with its neighbors and fellow EU members. More spending, a larger State, and heavier burdens for the productive class.

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