German Federal elections are approaching this Sunday and the race has been a tight one, not only in the last weeks, but also the last months. While we believe that Merkel will remain the Chancellor, with an estimate 30% of pollster still undecided, it’s unclear who her coalition partners will be.
In polling week-over-week, Merkel’s CDU/CSU party has held 40% while her current coalition partners, The Free Democrats (FDP), slipped half a point to 5.5%. The opposition, led by Peer Steinbrueck’s Social Democrats (SPD), gained 1% on the week to 27%, while its potential coalition partners the Greens lost -2% to 9% and the Left gained half a point to 8.5%. Other Parties, which include the anti-Euro Alternative for Germany (AfD), gained 1 point to 10%.
The polls equate to a lead of 1% for Merkel’s party with its current FDP coalition partners over the opposition SPD in coalition with the Greens and the Left. Note that despite slight shifts in the polls, Merkel’s 1% advantage this week is the same as she had a week ago. (See charts below)
As it relates to Monday’s markets, we expect that any coalition government that is formed with Chancellor Merkel’s party will represent a smooth transition to the market. As we describe further below, much of this “ease” is built on the fact that the SPD has a very similar outlook on EU and Eurozone policy.
We Expect Merkel Remains Chancellor, But Her Coalition Partners Are Uncertain
- A critical lynchpin surrounds how much support the FDP receives. The FDP has been a weak coalition partner 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.
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.
EU/USD Levels (Updated)
Given The Bernanke’s “No Taper” announcement on Wednesday, our quantitative support levels on EUR/USD have moved higher. TRADE support was in the $1.30-31 range prior to the announcement, now it’s at $1.33, and what was intermediate term TREND support at $1.31 is now our long-term TAIL support line. We expect an easy transition to Merkel’s new government will provide only further support in this cross, aided by a weaker USD on the back of Bernanke’s decision to push out the prospect of tapering its quantitative easing program.
Enjoy the weekend!