CSU Wins Bavaria, But Can Merkel Win Germany?‏

In the Bavarian state elections, CSU, the Bavarian sister party of Angela Merkel's CDU, won 49% of the votes - enough to secure an absolute majority. In 2008 CSU only got 43% of votes. On the face of it this is very positive news for Merkel just one week ahead of the German general elections next Sunday.

However, there are a few caveats. CSU, which is only present in Bavaria, has governed there for 56 years. Bavaria is richer and more catholic and conservative than the average German Länder. The results in Bavaria and the National results thus differ substantially. The most recent polls suggests CDU/CSU gets 39-40% of votes on Sunday.

If CDU/CSU's coalition partner FDP gets more than 5% of the votes next Sunday their combined share of votes (about 45%) should be just enough to secure Angela Merkel's current coalition a majority in the Bundestag depending on how many votes are wasted on parties that fail to enter the Bundestag.

But FDP only got 3.1% of the votes in Bavaria. At the national elections the threshold for representation is 5% and currently opinion polls suggest that FDP is hovering just around that. The poor outcome for FDP in Bavaria might cause some CDU/CSU supporters to tactically vote for FDP on Sunday in order to help FDP to get above the threshold.

If this isn't enough and FDP fails to come above the threshold next Sunday, Merkel will have to seek a grand coalition with the opposition party SPD. Merkel is not ruling out a grand coalition, but prefers her current coalition formation.

However, there is very little appetite for a grand coalition within the SPD. The last time the SPD joined a grand coalition with Merkel in 2005-09, its popularity plummeted to the lowest level in the post-war era.

A situation where no one wins a majority and lengthy negotiations will be needed to form a governable broad coalition could thus materialise. This could create some uneasiness among investors.

In our view, the current positive economic developments in Germany should increase the likelihood that the CDU/CSU, FDP coalition will be able to continue after the election next Sunday.

Both CDU/CSU and SPD are supporting the ongoing efforts to help peripheral countries. If anything, SPD's Peer Steinbrück is a little more relaxed when it comes to attaching strict conditions to the rescue packages. The euro sceptic Alternative für Deutschland is unlikely to get above the threshold.

The elections next Sunday are nevertheless an important event because sensitive European issues have de facto been paused in order not to upset the German voters. We expect to see renewed progress on issues from further help and eventually debt forgiveness for Greece to the banking union.

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