Osborne's ring fence will be made of cheese wire

Power to break up the banks.

So Osborne is going to "reset the banking system". A difficult thing to do with trust between Westminster and the banks at an all time low. How is he going to do it?

Well, first there's going to be a ring-fence: but it's to be not so much electrified as made of cheese wire - if banks don't respect it, regulators will be able to break them up.

It's not just about the fence though - he also plans to make the banking sector more competitive by making it easier to switch bank accounts, and by introducing a new regulator who'll aim to help out new competitors who want to enter the game. There are also talks over how consumer power can be increased, to hold the banks in check.

There is a plus side for the banks: the leverage ratio won't be changed beyond 1:33, but as might be expected, they have not taken kindly to the news:

Anthony Browne, the head of the British Bankers' Association said:

This will create uncertainty for investors, making it more difficult for banks to raise capital which will ultimately mean that banks will have less money to lend to businesses.

"What banks and business need is regulatory certainty so that banks can get on with what they want to do, which is help the economy grow. This decision will damage London’s attractiveness as a global financial centre.

"Uncertainty" isn't really the issue though - banks have been under changing regulation since 2008. The main problem for the banks will now be flexibility, according to Credit Suisse analysts (via FT Alphaville):

Reducing options to transfer capital and funding – As we understand it, banks will be under tight scrutiny to implement strictly a ring-fence. This will clearly limit the flexibility for banks when setting-up their ring-fence plans and limit options to transfer capital and funding. Although this is hard to estimate at this stage, this could increase the overall costs of the reform for the industry. We currently do not have an impact in our estimates.

If ring-fence is to work, it needs to be enforced - but as banks make their money by finding their way around such restrictions, a truly impenetrable fence'll cost. Here is a summary of the estimated hits to the economy via FT Alphaville:

Estimates costs from implementation – The draft legislation published in October 2012 highlighted the following costs for the broader industry and economy: (i) on-going costs of £2-5bn per annum, which compares to our total profit £26.1bn for the five listed UK banks in 2014E; (ii) one-off transitional costs of £1.5-2.5bn; (iii) negative GDP impact of 0.04-0.1%; (iv) reduced tax receipts of £150-400mn (this assumes all bank costs are passed onto the consumer); and (v) a reduction in the value of the government’s shareholdings in RBS and Lloyds Banking Group in the range of £2bn to £5bn relative to a ‘do nothing’ baseline scenario (compares to current value of £45.1bn).

If banks don't respect the fence, regulators will be able to break them up. Photograph: Getty Images
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Germany's election isn't about who will win, but who gets to join Merkel in government

Even small changes in vote share could affect who rules with the chancellor's CDU.

The leaves are falling and the ballot boxes are being given a final polish. It should be peak Wahlkampf. (Trust us Germans to have a word for "campaign" which sounds like something that should be barked by a soldier in a black-and-white film.)

Yet, instead of "peak campaign", with just days to go before polling day, we have an almost deadly dull one. Europe’s largest nation is being gripped by apathy. Even the politicians seem to have given up. Four years ago the then Social Democratic (SPD) challenger for chancellor, Peer Steinbrück, was so desperate to grab attention that he posed on a magazine front cover pulling the middle finger.

Instead Chancellor Merkel’s strategy of depoliticising the economic and social challenges Germany faces, and being endorsed as the steady mother of the nation, seems to once again be bearing fruit. Her Social Democratic contender has simply not been able to cut through.

So much so that for most voters the differences in policy agenda between Merkel’s Christian Democrats (CDU/CSU) and her main challenger Martin Schulz’s SPD are hard to detect. Not least because the SPD has spent the past four years serving under Merkel as the junior partner in a so-called "grand coalition". It doesn’t make it easy to distinguish yourself when you have just spent the last four years agreeing in cabinet.

This is dangerous and careless in an age of economic and political insecurities where voter volatility has reached new heights, and the radical right-wing AfD is forecast to get a vote share in double figures – a tally that would make it the third strongest party in the Bundestag.

It’s business as usual for Merkel who has copied the playbook that so successfully delivered three victories: picking no fights and managing expectations. Why change a winning formula? She wants to carry on chasing the political legacy of her hero Helmut Kohl by securing a fourth term in office.

Once again the "safety first" strategy is paying off. Her CDU/CSU is on course with the polls showing a solid 17 per cent lead over Martin Schulz and the SPD.

Merkel may be cruising to victory, but Germany’s proportional electoral system means that she won’t be able to govern alone. Which means the most exciting question in the German election isn’t who is going to win, but with whom is Merkel going to form another government. All eyes are on the different combinations of parties that would provide the chancellor with a new majority.

As it stands, it is very likely that for the first time ever, the Bundestag will be host to six political parties. More dauntingly, it will also be the first time since the Second World War that members of the radical right-wing will be sat in the chamber. Arguably, this political setback may be seen as a failure of moderate forces to find the right political solutions for the refugee and financial crisis – the AfD is essentially the offspring of both – but it is also part of a wider populist surge in Europe and North America.

This fragmentation of the party system in Germany will make it a challenging task for CDU/CSU to form a coalition. However, with the return of the liberal, and pretty unashamedly neo-liberal FDP, Merkel can potentially revert to a traditional centre-right ally. This would please those in her party who have been sceptical of her socio-economic move to the left, and blame her for the rise of the right-wing populists.

A report by the University of Mannheim provides us with a useful, if firmly scholarly, political version of those dating compatibility quizzes we all like to do in idle lunch hours. It finds that a coalition between the CDU/CSU and the FDP would be a natural match. They would agree on 20 out of 38 of the main policy issues in German politics. 

On which issues would coalition partners agree/disagree?

Only the other traditional “bloc coalition” between the SPD and Greens, which lifted Gerhard Schröder into the chancellery in 1998, would do better, matched on 24 issues overall. The study matches preferences on key economic, social, domestic and foreign policy of all major political parties and maps potential areas of conflict for all realistic coalition options. But polls currently show that neither of the naturally fitting centre-right or centre-left blocs would have enough seats to make a coalition work.

Which leaves three possible scenarios. The most intriguing would be the "Jamaica coalition" of the CDU, FDP and Greens (so called because the three party colours are the same as the Jamaican flag). Such an option has never been tried before at the federal level but is currently in power in Schleswig-Holstein. Alternatively, Merkel could follow the example of Saxony-Anhalt and try governing with her own CDU/CSU alongside both the SPD and the Greens. However, the new study finds that a three-way pact would be more prone to conflict and harder to negotiate than any of the two-party options.

More than two parties in a coalition would be an interesting novelty at the federal level, but disagreement on individual policy areas is expected to be considerably greater. The so-called "traffic-light-coalition" of the SPD, the Greens and the FDP would agree on 11 topics, yet disagree on 20 issues. And on top of issue-specific conflicts it would be more difficult to bridge ideological differences between parties at the different ends of the left-right dimension, as such between the SPD and FDP.

In the end it will all depend on how the numbers play out on election day this Sunday. The fact is that even minor shifts in voting behaviour from the current poll predictions would make a major difference to the options for government formation.

So, what should you look out for on election night? I would suggest keeping an eye on the liberals. What happens to the FDP’s vote share is crucial for whether they can return to their role as coalition queenmaker, after failing to jump the 5 per cent hurdle in 2013 and ending up with no seats. If the business-friendly liberals cannot deliver a majority for Merkel, the ball will be firmly back in the SPD’s court.

Gerhard Schröder used to say that a chicken is fat at the end (it makes more sense in German).

But if Schulz’s campaign does not pick up momentum in the closing hours of the campaign, and the Social Democrats' vote share collapses to around 20 per cent, its leaders will find it difficult to justify another grand coalition to SPD members.

They will likely be once again asked to endorse any grand coalition with the traditional conservative enemy in a one-member-one-vote ballot. Many inside the party fear that another four years as junior partners to the strategically astute Merkel could be the end of the road for the Social Democrats.

Florian Ranft is a senior researcher and adviser at Policy Network