Positions in Europe: Long British Pound (FXB); Short EWI (Italy), Short Spain (EWP)
We continue to be constructive on German economic fundamentals, despite the backdrop of sovereign debt contagion on the continent; however, state election results in Baden-Wuerttemberg over the weekend confirm that while Chancellor Merkel’s seat may not be in threat, the ability of her CDU party (along with her junior coalition partners the Free Democrats, or FDP) to pass federal legislation will be increasingly diminished. Below we present the recent state election shift to the Green party, and our view on utilities in Germany as nuclear power is increasingly voted down following Japan’s nuclear crisis.
Greens Capitalize on Merkel’s Flip-Flop
This weekend saw the punishment of Merkel’s conservative party at the hands of the Green party and the vote swung on one key issue: nuclear power in Germany. According to preliminary results, the anti-nuclear Green party polled 24.2% in the Baden-Wuerttemberg state election, double the share of the last vote in 2006, effectively capitalizing on the momentum from Merkel’s recent flip-flop stance on nuclear energy following the earthquake and tsunami in Japan.
Merkel’s flip-flop came with the decision on March 15, 2011 to shut-down seven of the country’s aging reactors for three months pending a safety review, after deciding last fall to extend the lifespan of the country’s nuclear reactors from 2022 to 2036.
The support for the Greens in Baden-Wuerttemberg over the weekend puts into play their likely coalition with the “Reds”, or the Social Democrats (SPD), which polled 23.1%, and with it the first state governor in Green Party history. The CDU polled 39% approval, but slipped a full 5.2 percentage points, and their coalition partners, the FDP, polled a mere 5.3%, and therefore a CDU-FDP coalition will likely come up short of a majority when the final tallies are released. For context, this notable party sea change comes in a state that has been governed by the CDU for the last 58 years!
Political Messaging and Utility Implications
The lead-up to the Sunday’s election result saw more than 250,000 people protest against nuclear power across four German cities on Saturday -- a clear spike amidst years of nuclear power as a hot issue. However, the Green party’s support over the weekend proves how important it will be for Merkel and Co. to rebrand her energy message at the federal level, in particular towards renewables and away from nuclear. Not only may Merkel be losing popular support, but Sunday’s results will further reduce the number of seats the CDU and FDP have in the upper house of parliament, the Bundesrat, and therefore limit Merkel’s sway to pass national legislation.
The clear losers in the move away from nuclear power in Germany are its utility companies, in particular the major power companies of Eon and RWE (both members of the DAX), and EnBW. (Below we show a map of Germany’s reactors for reference.)
Leading up to the earthquake in Japan and Merkel’s flip-flop, German nuclear power companies expected to pay a new nuclear fuel rod tax, estimated to amount to €1.2 - 2.3 Billion annually until 2016, as a concession for the extension of the country’s nuclear reactors. Now, following Merkel’s moratorium on the seven plants, recent news suggests officials at Eon, RWE, EnBW, and Sweden’s Vattenfall are preparing to file lawsuits against the German government on the decision to idle the seven power stations, and may test the legality of a nuclear fuel-rod tax.
In any case, the government’s potential shift to renewables, and the implications of the Green Party’s likely rule in the state of Baden-Wuerttemberg, could result in higher energy costs in Germany (and to its providers), including via higher energy taxes that the Greens may press for. Clearly, any additional taxes levied on nuclear power companies will eat into profits, and negatively impact the performance of the DAX.
Presently, our quantitative levels show that the DAX TREND line (3 months or more) is broken, and now the 7,078 line that was previously support is resistance. The DAX is flat YTD, having slid -10.4% since 2/28 to bottom at 3/16 and has now corrected +6.5%.
While there are still many unknowns about the outlook for the nuclear energy space in Germany, the results in Baden-Wuerttemberg in favor of a nuclear phase-out will have significant implications for Germany, a country that gets about 23% of its power from nuclear (vs 28% in Europe and 80% in France), as Merkel maneuvers alongside her weakening legislative hand.