06:44 AM EST, 11/07/2024 (MT Newswires) -- German Prime Minister Olaf Scholz (SPD) dismissed Finance Minister Christian Lindner (FDP), noted Berenberg.

With the exit of the FDP from the three-party coalition, Scholz has lost his majority in parliament. He wants to call a confidence vote for Jan. 15 to pave the way for snap parliamentary elections in March, bringing forward the regular elections -- so far scheduled for Sept. 28, 2025 -- by at least six months. Until a new government is formed, Scholz will lead a minority government backed by his SPD and the Greens.

The early end of the coalition leaves Germany somewhat rudderless in what could be an exceptionally turbulent time right after Donald Trump won the United States presidential election, said the bank. The minority government will almost certainly not be able to pass a budget for 2025.

However, parliament may still enact some less controversial laws, possibly with case-by-case backing by the opposition center-right CDU/CSU. If need be, the mainstream parties including CDU/CSU and FDP may also agree to ramp up German support for Ukraine.

Opinion polls suggest that all three parties that had put Scholz in power three years ago, his own SPD, the Greens and the FDP, will lose votes in snap elections. Polls put support for the main opposition party, the CDU/CSU, at about 32%, well ahead of the SPD with 16%, the Greens with 11% and the FDP with just 3%-4%. No mainstream party would team up with the right-wing AfD (17% in the polls).

As a result, the snap elections will most likely usher in a new government led by the CDU/CSU. But the CDU/CSU will need at least one coalition partner from the center-left, either the SPD or, less likely, the Greens. The center-left will probably insist on loosening the debt brake, which has been a major bone of contention between the FDP and its center-left partners in the now-defunct coalition, stated the bank.

To be installed as premier, CDU boss Friedrich Merz will -- after the election -- probably agree that the ceiling for the cyclically adjusted deficit either needs to be lifted somewhat above the current 0.35% of gross domestic product or that Germany needs a new off-budget special fund, for example, to put increased military spending on a secure basis.

Berenberg expects the result of post-election negotiations between the CDU/CSU and its future center-left coalition partner to be a package of reforms that will strengthen supply and demand, with more room for public investment, a cut in business taxes, a pruning of welfare and pension benefits, and a more rational immigration policy. Except for some temporary gimmicks, such a reform package will require additional fiscal space, either by raising the deficit ceiling of the debt brake somewhat or by resorting to an off-budget instrument similar to the 100 billion euros special fund for military spending.

Such a reform package seems to be the most likely result of new elections. However, the risk to this base case is "significant," added Berenberg. A reform of the constitutional debt brake would require a two-thirds majority in parliament.

Snap elections as such come with risks. However, they probably make economic and political sense nonetheless. The constant bickering within the now-defunct three-party coalition had turned into a major obstacle to growth.

Faced with grave uncertainty about the future course of economic policy, companies have increasingly held back with investment in Germany so far this year. Germany could benefit from resolving this uncertainty after snap elections next spring instead of having to wait until after the regular date of next September, according to the bank.