The upcoming election might be a small step for Germany but could be a giant leap (or setback) for the Eurozone
With one more month to go, the German election campaign should currently be at its peak…should. The reality is a rather unexciting campaign, characterised by Chancellor Angela Merkel’s high popularity and the inability of all the other parties to initiate an accentuated debate. It would almost need a political miracle to prevent a fourth term in office for Merkel. However, what looks like a minor event for Germany could turn out to be a major event for the future of the Eurozone.
After the excitement around the national elections in the Netherlands and France earlier this year, the German election seems to usher a welcome change in terms of dullness. Neither the ongoing campaign nor the potential election result is likely to have resulted in sleepless nights for any financial market participant. What German observers and voters in particular might consider ennui, looks like admirable solidity and stability in the eyes of most international market participants and observers.
Indeed, judging from the latest polls (and the trend over the last two months), chances are extremely high that Chancellor Merkel and her party will come first on 24 September, followed by the SPD, the current junior coalition partner. Only a political miracle, unexpected external events, a huge scandal or completely wrong polling could probably hinder a fourth term in office for Angela Merkel. However, the question of who will be Merkel’s coalition partner(s) will be unanswered until after election night. With four parties currently at c.10% in the polls, the race for No.3 is wide open and, in our view, the most exciting feature over the next few weeks. Small changes in voter preferences could make a big difference.
Currently, and based on recent polls, almost everything is still possible. The options for the next German government range from an absolute majority for Merkel’s CDU party to coalitions of the CDU with the liberal FDP, the Greens or the SPD or even a three-party coalition led by the SPD (though very unlikely).
Why should we care about which parties join the next coalition…is it not enough to simply bank on Angela Merkel? Not really. In our view, and assuming that the next German government will be led by Angela Merkel and the CDU, Merkel’s choice for a junior coalition partner (if the election outcome allows for a choice) will definitely have an impact on the future of the Eurozone. While more public investment and few structural reforms appear likely in any government headed by Merkel, the plans for future Eurozone integration could range from ‘muddling through’ or a return to a strict no-bail-out clause and a Eurozone budget with a European Monetary Fund.
In all, after the election excitement in the Eurozone in the first half of the year, the German elections are a welcome return to solidity. However, let us not underestimate the German elections. It still has some potential surprises in store, particularly when it comes to the future of the Eurozone…even if the excitement might have to wait until the coalition talks after 24 September.