Carsten Brzeski's blog

Two tales of one economy

Benchmarking the German economy at the start of the election campaign
In slightly more than five months, Germany will go to the ballot boxes. Even though the German economy is the showcase model for the entire Eurozone, we expect the economy to become an important topic in the election campaign. While Angela Merkel’s CDU is likely to emphasise strong economic fundamentals, the SPD and front-runner Martin Schulz will probably try to criticize shortcomings of the current growth performance. To many observers, the campaign could sound like two tales of one economy. Let’s have a sneak preview.

While financial markets are still keeping close eyes on France and the upcoming presidential and parliamentarian elections, Germany is getting off the starting blocks for its own exciting election year. As probably the last national election of the year in a core Eurozone country, the German national elections had been widely regarded as an example of political stability and hardly any excitement – a view which could be proven wrong. The German elections are not very likely to deliver a populist surprise, which could hit the heart of the Eurozone, but an outcome, which sees a new government coalition and possibly even a new chancellor, is clearly a possibility. This is a possibility financial markets have not yet priced in.

Germany is preparing for a much more exciting election campaign than previously expected as former president of European Parliament, Martin Schulz, has awakened the social-democratic party (SPD). Since the announcement of Schulz running as the SPD’s front-runner, the party has gained some 10% percentage points in the opinion polls, rising from all-time lows of around 20% to almost being on par with Angela Merkel’s CDU. As regards individual popularity Martin Schulz has even passed Angela Merkel. Obviously, with more than five months to go, it is far too early to give any guesstimates on the possible election results. We will revert to the political landscape, possible election outcomes and possible coalitions in a later report.

In our view, the main topics deciding the elections will probably be internal security, the refugee crisis (although ebbing away), social justice and the economy. Also, the personality and popularity issue (likeability, fatigue and appetite for change) between Merkel and Schulz could in our view be more important for the election outcome than in previous elections.

As regards the economy, Germany will probably experience an almost ironic controversy on the reforms of the 2000s during the upcoming election campaign. Merkel and the Christian-democrats will defend the reforms and point to the current strength of the economy, even though they were in the opposition back then. At the same time, Schulz and the Social-democrats will have to explain the voters why they now want to reform the reforms, even though they have been part of the government in 16 out of the last 19 years.

Despite the fact that the reforms of the 2000s have become an issue of the political discussion, up to now the biggest political parties have not yet addressed the economic issues which probably matter most, ie, investment and structural reforms, Bill Clinton’s “it’s the economy, stupid” could dominate the German election campaign this year.

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