With this note we provide an update on the potential outcome of the snap elections that will be held in Germany on 23 February. The conservative Union parties (CDU/CSU) should be the senior partner in any potential coalition that might technically be possible, while a Grand Coalition with the Social Democrats (SPD) looks most likely for now. Not only based on the numeric lead over eg a coalition with the Green Party, but also reflecting statements from the Union parties'' top politicians. What is at stake and what is the debate? Putting the economy or social welfare first Following the implosion of the traffic light coalition (SPD, Grune, FDP) in early November as a result of repeated disagreements regarding the German budget for 2025 (financing, strategic priorities), the higher-level debate is around what should be prioritised, in our view: the economy (pro: Union parties, FDP) as a funding source to support the general population or social welfare (SPD, BSW). Sharp rise in unit labour costs reflects the gradual decline in competitiveness The competitiveness of the German economy has suffered from a mix of high energy costs, corporate taxes and bureaucratic hurdles, all of which have resulted in an unfavourable trend in unit labour costs relative to other countries, both in Europe and globally. As a consequence, the debate boils down to the need for structural reforms vs maintaining the status quo, also via taking on more debt. 2-party scenario allows a coalition of Union-SPD or Union-Grune Based on the latest polls, there are 3 potential outcomes - this assumes that the more established parties stick to their word to not team up with the AfD party. While there isn''t an absolute majority of the votes in any of the 2-party coalition scenarios (requires a 3-party coalition of Union-SPD-Grune), the 5% hurdle-rule would allow a parliamentary majority for 1) Union-SPD and 2) Union-Grune. Also see ECONOMICS: Germany: Early elections positive, but no...