The German government is on the verge of collapse. Here’s what happens next:

Germany’s ruling coalition has long been on shaky ground amid deepening divisions over economic and budget policies between its three political parties.

The situation has intensified in recent weeks, sparking concerns about the state of the three-year-old coalition between Chancellor Olaf Scholz’s Social Democrats (SPD), the Greens and the Free Democrats (FDP).

Speculation is rife about whether the alliance could break up as early as this week, with media outlets reporting talks between several coalition representatives on Sunday night and earlier this week ahead of Wednesday’s regular coalition meeting.

“German politics seems to have become a slow-motion train crash. The German government has just entered a new phase of a slow-burning political crisis that could be the final stage before the ultimate collapse of the ruling coalition,” said global head Kar. said Carsten Brzeski. ING’s macro manager said in a note Monday:

Berenberg’s chief economist, Holger Schmieding, noted that the three coalition partners were behaving “as if they were preparing to soon campaign against each other.”

For example, Scholz held a meeting with industry leaders last week but did not invite his party’s coalition partners, leading the FDP to convene a separate meeting without the SPD.

Separately, German Economy Minister Robert Habeck of the Green Party proposed a policy plan to stimulate corporate investment, but the FDP criticized it.

Another escalation occurred on Friday when Finance Minister Christian Lindner published a paper on reviving Germany’s struggling economy.

“The paper reads like a serious attempt to analyze Germany’s problems and propose solutions,” Greg Fuzesi, euro area economist at JPMorgan, said in a note. “But it is an argument that runs counter to the fundamental positions of the SPD and the Greens, so it will be difficult to accept.” . monday.

Brzeski said he was not necessarily concerned about the paper’s content, even if it ran counter to the main policies of the Social Democrats and the Greens, but said “the tone of voice in the paper shows how cold the mood is between the coalition partners.” It has been done.”

In a Sunday TV interview with ZDF, Lindner said the problem would be resolved, noting it was largely the responsibility of his governing partner. He dodged a question about whether he would consider leaving the coalition if his proposals to boost the country’s economic growth were not supported.

A key issue within the coalition recently has been Germany’s 2025 budget. This topic was also covered extensively in Lindner’s paper. The budget was first submitted earlier this year but left several questions unanswered about the multibillion-euro funding gap. Based on the current operating schedule, the budget is expected to be finalized by mid-November.

Fuzesi said the coalition now had to make difficult decisions under time pressure amid differing economic visions and a government ruling last year that the government could not reallocate emergency funds left a loophole in Germany’s finances. The COVID-19 pandemic was reflected in the budget.

Meanwhile, Berenberg’s Schmiding suggested that “the government could fall if the coalition fails to agree on fiscal and reform priorities for the 2025 budget.”

In addition to finding a solution to the problem, several scenarios may now arise that could change the composition of the German government.

One is that the FDP could withdraw from the coalition, either by resigning on its own or by irritating Scholz enough to ask them to leave, Berenberg’s Schmiding said.

“That would likely lead to a brief SPD-Green minority government under Scholz, followed by snap elections early next year,” he said. However, recent opinion polls show that the FDP will only get around 3% of the vote in the federal election. This is below the 5% threshold that must be passed to gain a seat in Germany’s federal parliament.

The Social Democrats (SPD) and Greens will also suffer losses in the last federal election, with the current opposition Christian Democratic Union (CDU) most likely to secure the largest share of the vote.

“A quick election is not yet the most likely scenario, but it is entirely possible,” Schmieding said.

Meanwhile, ING’s Brzeski noted that the minority government could continue until the scheduled election date at the end of 2025, and pointed out that even if the FDP were to leave the coalition, this would not necessarily force a snap election.

This is because the German constitution stipulates that the federal president can call snap elections only if the chancellor loses a vote of no confidence in parliament.

But according to Brzeski, prospects for a union appear weak.

“Overall, I don’t think the risk of a German government collapse has ever been higher,” he said. “Even the potential geopolitical uncertainty posed by the upcoming US election no longer seems to be a guaranteed glue to hold the government together.”