LONDON (Reuters) – Germany faces months of tough negotiations to form a coalition government after Sunday’s federal election, with three parties needing to team up to clear the threshold of 50% of all seats in the Bundestag.

Olaf Scholz’s center-left Social Democrats plan to seek a coalition with Greens and FDP in a “traffic-light coalition.” Christian Democrat nominee Armin Laschet will also attempt to form a government together with the FDP’s Greens. This would create a “Jamaica”, coalition named after that country’s flag colours, black, yellow, and green.

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GERGELY MAJOROS, MEMBER OF INVESTMENT COMMITTEE, CARMIGNAC

“So far, there is little visibility in terms of a potentially significantly looser fiscal policy in Germany going forward, even though spending related to climate change should be part of the outlook either way. It is unclear what the German future position will be regarding EU fiscal rules. 

“This election outcome confirms our prudential approach to European core rates markets. While the negotiations for the coalition could take a while, financial markets now enter the critical phase of normalization of fiscal and monetary policies. Additionally, there is a possibility that economic growth may slow, but inflation might still rise. It is a tough situation overall for fixed-income investors and central banks.

GREG FUZESI, JPMORGAN

“Both the Jamaica and Traffic Light options would produce continuity from the current government in terms of fiscal and EU policies. Although a Traffic Light alliance would be more convenient for each party, it would still be a significant departure from the government in place. The general election will likely signal continuity, despite a change in direction.

BERENBERG

“Differences in the overall fiscal stance between traffic light and Jamaica would not be big enough to change the outlook for German or Eurozone aggregate demand. The constitutional debt brake would not be changed by either coalition, nor would it approve major changes to EU rules.

You can expect to see some modification and an open interpretation of the rules. Somewhat counter intuitively, the scope for such tinkering with or modest changes in the domestic and European rules – as well as for tax changes – would be a bit larger in a Jamaica coalition including the CDU/CSU.

The centre-right could use its veto in many Bundesrat matters (upper house) to prevent significant changes in a traffic light coalition that does not include the CDU/CSU. FDP’s core demand that no tax rises be implemented is likely to prevail over its request for complete fiscal prudence.

BLACKROCK INVESTMENT INSTITUTE

The conservative CDU/CSU and the social democrat SPD have come out almost neck and neck in Germany’s federal election, meaning either one has the potential to lead a likely moderate coalition government. Due to its poor showing in the election, Die Linke’s left-wing party seems to have eliminated a left-wing alliance and likely had a negative effect on German stock prices.

SEBASTIAN GALY, NORDEA ASSET MANAGEMENT

“The conclusion from this is that the FDP could put some damper on helping the euro zone particularly in a crisis, though the wind blowing from Frankfurt on the ECB is likely to be on the margin more helpful. The likely outcome is similar to that of the ECB: the Green angle will become central to government.

DAVID FOLKERTS-LANDAU, DEUTSCHE BANK

“The various international and economic crises during the 16 years of the Merkel government forced a rather reactive policy approach. A proactive strategy from the next government is required to address the U.S.-Chinese tensions, Brexit, and the growing need for a stronger EU.

This new position…comes at an important time when Germany’s economy is being threatened by negative demographics and structural disruptions caused by digitalisation, as well as the difficult quest for climate neutrality over the next 20 years.