Crunch time for Germany as elections loom

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Crunch time for Germany and euro zone as elections loom
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German voters will go to the polls this weekend in a national election whose outcome could change the future of Germany and the euro zone. With one day of campaigning to go before the votes are cast on September 22, the outcome of the election and its potential impact on Europe is still uncertain, according to analysts and voter polls.

According to the latest polls, Merkel's conservative lead has narrowed ahead of the vote on Sunday. Merkel and her conservative CDU/CSU coalition would receive 38 percent of the vote, an INSA poll showed on Thursday. Meanwhile, while the coalition's junior partner, the Free Democrats (FDP), would receive 6 percent of the vote giving the coalition a combined 44 percent -- not enough to give them a majority in parliament,

INSA's poll showed that the main opposition social democrat party (the SPD), led by Peer Steinbrueck, had 28 percent of the vote, while the Green party had 8 percent of the vote.

One potential upset could be the anti-euro Alternative fur Deutschland (AfD) party , which has hit the 5 percent threshold enough to gain a seat in parliament, the poll showed. The INSA poll is broadly matched by a telephone poll of voters by public television network ZDF.

(Read more: How does Germany's electoral system work? )

If the polls are borne out in the public vote, Merkel would likely return to serve a third time in office but could be forced into forming a "grand coalition" with her rival Steinbrueck and his center-left party.

This could mean a change in policy for Germany, Europe's biggest economy and a powerful influence in the 17-country group of countries that use the euro. The country has drawn criticism over its insistence that harsh spending cuts -- rather than measures to encourage growth - are the answer to the euro zone's crisis over too much government debt.

A "grand coalition" could cause Germany's policy towards Europe to be more "constructive and euro-friendly," Sebastian Dullien, a professor for International Economics and senior policy fellow at the European Council on Foreign Relations told CNBC on Friday.

"In a grand coalition, Merkel will have much more leeway to do what it takes to save the euro than in the current coalition."

However, other analysts predict the elections will likely mean "more of the same" in terms of Germany's policies towards its debt-ridden southern euro zone neighbors.

"There are some expectations to see some bold moves from Germany after the elections and I think we're going to be disappointed. The key word here is 'continuity'," David Costa, dean at Robert Kennedy College in Zurich, told CNBC on Friday.

"The agenda in terms of post-election is still going to be a slow recovery for Europe because the idea of Germany is really to stay on course in terms of fiscal austerity and low inflation. Germany will certainly resist pressure to implement measures to increase spending."

Irwin Collier, professor of economics at the Freie Universitat Berlin, said that any coalition would continue to support the euro, however.

(Read more: Goodbye southern Europe: Germany's alternative? )

"It's interesting which coalition shows up at the end of Sunday or in the next week but essentially we're going to see the same euro zone policies, such as allowing adjustments to be made in the periphery as long as structural reforms are seen...Everything will be done to protect the euro, that is clear. The backstop of the euro will remain Germany's fundamental commitment to the euro."

Merkel and Steinbrueck have been using their last week of campaigning to focus on their leadership differences. At a campaign rally in Berlin on Thursday, Steinbrueck dismissed the polls and attacked Merkel's leadership, saying she was too cautious and lacked his leadership style.

In the meantime, many German voters still see Merkel as a "safe pair of hands." Nicknamed "mutti" (mother) by the German electorate, Merkel has portrayed herself through her campaign as a stable figure who has presided over a nascent economic recovery in the euro zone and an economically resilient Germany.

Anti-euro zone sentiment is running high among German voters who feel that they have had to bail out their more financially imprudent euro zone neighbors during the region's economic crisis. This, combined with a large contingent of undecided voters of around 30 percent, according to an Allensbach poll this week, could complicate a post-election outcome further.

(Read more: Anti-euro party powers ahead as German elections near )

"Although we remain cautious about AfD's prospects of securing seats in the Bundestag [the German parliament] we certainly do not rule it out," Alastair Newton, senior political analyst at Nomura said on Thursday, warning that a risky "post-election hiatus" was a more likely threat to post-election stability in Germany.

"We stand by the forecast set [that] the most likely election outcome remains a grand coalition of the CDU/CSU and the SPD. However, the post-election process of getting a [such a] government in place may be far from straightforward. We stress again that none of this implies any significant shift in Germany's policy towards the euro zone crisis," he added.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld



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