Germany takes a step toward post-Merkel era but the race for her successor is wide open

German Chancellor Angela Merkel during a press conference following a meeting of the German government coronavirus cabinet task force during the second wave of the coronavirus pandemic on November 2, 2020 in Berlin, Germany.

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Germany moved another step closer to a post-Angela Merkel era at the weekend, with her ruling Christian Democratic Union electing a new chairman.

Armin Laschet beat off competition from conservative rival Friedrich Merz to win 521 votes to 466 in the party leadership election that took place online due to the coronavirus pandemic.

Laschet, who leads the North Rhine-Westphalia region, is seen as a centrist and able to unite the ruling CDU's broad church of members, from conservatives and pro-business members of the party to environmentalists, and is seen as a continuity candidate following Merkel's pragmatic approach.

Still, while winning the party leadership puts Laschet in the ring as a possible contender to become Germany's next chancellor, it's by no means a done deal.

What to watch for?

In the next few months, Laschet will need to decide with Markus Söder, the leader of the CDU's Bavarian sister party called the Christian Social Union, who will be the CDU-CSU's joint candidate for chancellor.

Whether the candidate will become chancellor will then depend on the outcome of the national election on September 26, which also marks the end of Merkel's fourth and final term in office.

As well as Laschet, Söder is a key contender for the chancellery although he has not yet expressed whether he will run. Nonetheless, he remains a popular choice.

A poll published on Sunday by Civey for the Focus Online magazine showed that 43% of Germans would prefer Söder as the candidate to succeed Merkel, with only 12.1% backing Laschet. In third place, with the backing of 8.7% of those surveyed, was Health Minister Jens Spahn, an ally of Laschet.

Mujtaba Rahman and Nas Masraff, managing director and director of Europe research at Eurasia Group, said in a note Saturday that Laschet faces an "uphill battle to prove his strength and leadership over the coming weeks and months."

"We still think he is the frontrunner in the race (a 55% probability) as he will play hard and won't give in to Soeder easily. Laschet also has history on his side: The CSU has only put forward a chancellor candidate on two previous occasions to represent the Union parties and both times they were defeated in elections." However, they added, "Soeder is extremely popular."

"If this remains the case, the CDU base and the parliamentary group may calculate that they will be better off in September's elections under Soeder's leadership and put pressure on Laschet to give up the post."

Eurasia Group sees a 30% chance that Söder will run for the chancellery candidacy and succeeds. Regardless, they noted that Laschet and Söder "get along pretty well" so any decision is likely to be a smooth rather than disruptive one.

Decisive regional elections

A final decision over who will run as the CDU-CSU candidate is expected to be made in spring, after several prominent regional elections in mid-March.

Jana Puglierin, head of the European Council on Foreign Relations (ECFR) in Berlin, told CNBC Monday that the regional elections in Rheinland-Pfalz (Rhineland-Palatinate) and Baden-Wurttemberg are crucial in determining which candidate is fielded.

"If the CDU does well in these elections, and if Laschet guarantees the backing of the party and brings the different camps (within it) together ... then he will be the candidate for chancellor," she said.

If regional elections did not go well for the CDU, then, Puglierin said, Söder might be the preferred candidacy for chancellor.

Holger Schmieding, chief economist at Berenberg, told CNBC Monday that what investors need to watch out for is not whether Laschet or Söder is the candidate to replace Merkel, but the "tail risk that the conservatives may not be in power at all once Merkel leaves office later this year and that Germany may get a green-red-red coalition instead."

This would entail a coalition government formed of the Green Party, the Social Democratic Party (currently a junior coalition party with the CDU-CSU) and Die Linke, the Left Party.

"Such a government without the CDU/CSU may harm the economy through some reform reversals and more regulations. As most major fiscal decisions would need to be approved by the upper house of parliament in which the CDU/CSU would still have a veto, the size of any future stimulus and Germany's support for its European partners would only be affected modestly," Schmieding noted.

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