With the German Federal election approaching on September 22nd, below we provide our analysis on the outlook of the race and what the elections mean for Eurozone policy and the markets.
Background and What The Polls are Saying?
- Poll results over the summer months have suggested a very close, head-to-head match between Chancellor Merkel’s coalition of the CDU/CSU and Free Democrats (FDP) and the opposition led by the SPD (under Peer Steinbrueck) in a coalition with the Greens and likely the Left party (Linke) despite much friction. We’ve seen Merkel’s coalition favored by at most 1-2% over recent weeks.
- A critical lynchpin surrounds how much support the FDP receives. The FDP has been weak coalition partners for Merkel, at times struggling to retain the mandatory 5% level across state elections. Currently polling around the 4-6% level, FDP support is absolutely critical for Merkel to win a combined majority with her CDU/CDS party, if she does in fact want to extend her coalition. It’s uncertain if the anti-euro Alternative for Germany Party (AfD) may sway voters away from voting FDP.
- CDU/CSU and FDP Coalition Wins (known as the Black/Yellow Coalition or in German, Schwarz-Gelbe Koalition): We assign a continuation of the current coalition as the most likely outcome. Chancellor Merkel has enjoyed the popular support of the people. Despite dissatisfaction in bailing out member states, Germans have broadly applauded the way in which she’s handle the sovereign debt “crisis” and the majority of Germans favor remaining in the Eurozone.
- CDU/CSU and FDP Coalition Does Not Win: We expect the formation of a coalition government between Merkel’s CDU/CSU and Steinbrueck’s SPD (also known as the Grand Coalition, or Grosse Koalition), despite statements from Steinbrueck that he would not form a coalition with Merkel. Germany’s last Grand Coalition was in 2004-9.
- On the anti-euro AfD party and undecided voters: Key considerations to this election are the support that the AfD party may receive (it’s currently around 3%, or below the 5% required to make it in the Bundestag, the lower house of parliament) and the large number of undecided voters, over 30% according to some polls. Commentators suggest that Germans may be embarrassed in polls to admit support for the AfD, and therefore the party will poll higher in the actual vote. The AfD is a vehicle to express dismay with the Eurozone project and bailouts of member states. It’s unclear just how much support they might come out with.
Steinbrueck’s Middle Finger
- Steinbrück was nominated to lead the SPD in October 2012 and was Merkel’s finance minister during the 2007-2009 financial crises.
- Today Steinbrueck appeared sticking up his middle finger in a black and white photograph on the cover of the Sueddeutsche Zeitung. The image was taken from a photo-essay titled “Don’t Say Anything Now” in which subjects were asked to respond non-verbally to questions. There’s only speculation at this point on the intent of the finger, however it does appear he approved the use of the photo, and is not an ode to the artist Ai Weiwei (joke). It’s hard to say what reaction he was trying to get out of the photo, but the media has already taken off with it, mostly under the mantra that that sticking up the middle finger is not appropriate gesture for a Chancellor.
- For reference, Steinbrueck is known for his political gaffes: in late 2012 he proclaimed that German Chancellors were underpaid, a severe misstep given his highly publicized earnings for speaking engagements over the last three years at the time (estimated at €1MM). And he also said that he would never buy a bottle of Pinot Grigio for less than 5 euros, language out of touch with a SPD party platform that represents the working class.
- It’s hard to determine how much impact this photo will have and if it will play into the minds of voters on election day, however our guess it will do him more harm than good.
CDU/CSU vs SPD: EU Policy Positions and Market Outlook
- A key takeaway is that if the current coalition wins or a Grand Coalition with the SPD is formed, both coalitions are orientated in the same way on most EU policies, including:
- Austerity: both parties favor fiscal consolidation at the state level, especially as a prerequisite for bailout funding,
- Eurobonds: both parties are against issuing Eurobonds,
- On the Banking Union: both are in favor of greater separation of ECB monetary policy and its supervisory role over the banks and regulation at the national level; both are opposed to a deposit guarantee fund,
- On Greece: both parties recognize the likely need for a 3rd bailout; both are delaying any major decisions until after the election.
- The outcome: Eurozone policy will like be unchanged; an “easy” transition should not disturb the markets.
Bavarian State Elections this Weekend. A Preview for National Elections?
- This weekend there is a state election in Bavaria. Merkel’s CSU party looks to be a clear victor.
- Bavaria is the secondly biggest of Germany’s 16 states by territory and the second largest by population (12.4MM people).
- The CSU is polling at 47%; SPD 18% and Greens 12%, FDP 4%.
- The AfD is not running in Bavaria, so we’ll get no updated clues, but it will be interesting to see how the FDP, SPD and Greens fare.