Fresh elections in Germany still most likely outcome, Berenberg says

The German state has not been left moribund by the recent failure of talks aimed at forming a new coalition government, nor will it significantly derail a push for reforming the euro area's architecture or the Brexit negotiations, a top-rated economist said.

Indeed, while all the main parties had indicated a preference for holding a new ballot - likely in March or April - little was likely to change in terms of the proportion of votes obtained by the different sides, said Berenberg chief economist Holger Schmieding.

"All parties would likely fight new elections with renewed vigour, with a chance to mobilise their base better than before as the repeat elections would seem less boring than those on 24 September when most people assumed that Merkel would win anyway," he said.

Yet the final outcome would be a coalition government with the centre-right CDU/CSU as the senior partner - unless Merkel's party did very badly.

As far as the government's ability to pass key legislation was concerned, it was still perfectly capable of adopting decisions which could not wait, Schmieding said.

There might be some slippage - of a few months - on the goal of adopting the first key decisions on euro area reform, he added.

Then again, "Berlin had only a limited readiness to go for a fundamental French-style overhaul of the EU27 and the Eurozone anyway."

And what about Brexit? "No change: This is no major issue or bone of contention in Berlin. By and large, Berlin will back EU chief negotiator Barnier’s position. If Macron wants the EU27 to take a tougher line than Barnier, Berlin would probably side mostly with Macron," was the economist's answer.

According to Schmieding, another possible outcome now - albeit less likely - was for the SPD not to push for a new vote and instead try and extract major policy concessions, cognisant that it might not get a second chance, as some moderate Socialists had begun to ponder aloud.

"Some SPD officials have also wondered whether support for a CDU/CSU minority government may be an option. Expect a week or two of reflection first before the outlook becomes clearer, with some focus on the meeting between Steinmeier and SPD chairman Schulz (probably tomorrow according to tagesschau.de)."