Merkel, SPD reach preliminary deal to form new German government


Horst Seehofer, leader of the Christian Social Union party ( left), German Chancellor Angela Merkel (center) and Martin Schulz, leader of the Social Democrat Party, arrive for a news conference following overnight coalition negotiations, at the SPD headquarters in Berlin on Jan. 12, 2018. Photo: Bloomberg Photo By Krisztian Bocsi. / © 2018 Bloomberg Finance LP

Chancellor Angela Merkel reached a preliminary accord with Germany’s Social Democrats to negotiate a coalition government, advancing her bid to end political gridlock and open the door for her fourth term.

After a marathon of more than 24 hours of talks, leaders of Merkel’s Christian Democratic Union, her Bavarian sister party and the Social Democrats hammered out an agreement that outlines a possible alliance. Almost 16 weeks after her party won an inconclusive federal election, Merkel’s second attempt to restore leadership in Europe’s dominant country yielded progress, with an agreement to move on to a shared program for government.

“We’ve carried out intensive, serious and profound exploratory talks,” Merkel told reporters at SPD party headquarters in Berlin on Friday. “The paper we produced is not a superficial paper, but shows that we worked hard.”

The main hurdle to a rerun of the so-called grand coalition of Germany’s two main parties now lies with the Social Democrats, who at first refused to extend their alliance with Merkel after suffering their worst electoral defeat since World War II. The SPD leadership will put the result of the exploratory talks to a party convention on Jan. 21.

“It was clear to us from the beginning that it wouldn’t be easy to carry out these exploratory talks,” said Social Democratic leader Martin Schulz. “I think we produced excellent results.”

The progress in stabilizing Germany’s government propelled the euro to a three-year high versus the dollar to trade at $1.2131 as of 10:41 a.m. in Frankfurt. This near-term reaction adds to gains seen Thursday after a shift in ECB messaging that was deemed to tilt more hawkishly. Still, investors warned of potential hurdles ahead.

“Coalition investors perhaps should be wary of being too euphoric just yet,” said Jeremy Stretch, currency strategist with CIBC. “Any pushback on Jan. 21 could unleash a German political earthquake.”

The German parties’ glacial place in setting up a new administration is testing the patience of voters who gave Merkel’s Christian Democratic-led bloc the most votes in the Sept. 24 contest. Merkel, 63, has been acting chancellor since, putting most policy making in Europe’s biggest economy on hold.

While the German economy goes from strength to strength, her bloc and the Social Democrats are seeking to hold a political center that’s been eroded by the rise of the far-right Alternative for Germany, or AfD.

Many SPD members are wary of serving as Merkel’s junior partner for a third time after the party’s support plunged to the lowest level since World War II in September’s federal election. Should the SPD party conference in Bonn approve the preliminary deal this month, the negotiating partners will embark on weeks of formal coalition talks to set the agenda of the new government.

The chancellor is under pressure to succeed after her attempt to patch together a coalition with the Green party and the pro-market Free Democrats failed in November. Any coalition pact will have to cover the gamut from left-wing SPD members to the socially conservative CSU in Bavaria.

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