“SHOWMANSHIP”

ELECTION PREVIEW: Merkel’s push to Build a NEW Coalition Government

 

Yesterday German Chancellor Angela Merkel arrived in Pittsburgh for the start of the G20. Unlike her global counterparts, Merkel has an election to win back home on Sunday. While it would appear disadvantageous for her to have left the campaign trail, we view her appearance at the G20 as a net positive for her campaign as it reinforces her creditability as a global leader working to solve the larger issues facing global economies. As we’ve hammered on in many posts this year, the task of returning growth to Europe’s largest economy has been no small feat, yet through Merkel’s leadership the country grew +0.3% in Q2 quarter on quarter—a gain not shared across most of Europe.

 

Below we’ve broken down the main parties and their platforms going into elections. Unlike in the US, German campaigning is carried out on a much smaller scale: not only can budgets not be compared to those in the US, but really only starting this month did candidates hold public (televised) debates.  With less than 48 hours before the vote, we like Merkel’s chances, yet her opposition Frank-Walter Steinmeier of the Social Democrats could stage a late comeback which would have serious implications for a governing coalition and impact the TAIL for economic and business development:

 

 

Chancellor Merkel and the Conservatives

 

Germany’s largest party, the Christian Democratic Union (CDU), together with their Bavarian Christian Social Union (CSU) allies, has held a steady lead in polls this year under the slogan, “We have the strength”, positioning the party as the only contender to make Germany stronger than it was before the crisis. On Merkel’s watch—in the last year alone—she has been responsible for issuing a measured stimulus package to promote growth (while not piling on excessive levels of public debt), crafting arguable the strongest auto rebate programs across the globe to incentivize growth in Germany’s all-important automobile industry, forming bad banks to remove toxic asset from bank balance sheets, leading negotiations to save Opel—a catalyst for demonstrating her focus on saving jobs—and has made tough decisions like the refusal of the government to bailout Arcandor AG, owner of one of the country’s largest retailers, Karstadt.  Despite a handsome spread over her challengers this year, the CDU has seen its support wane ever so slightly in September. The most recent polls suggest the CDU leads the SPD by a spread of ~10-11% (See Chart Below).

 

“SHOWMANSHIP” - MH GERMAN election 1

 

Platform: the CDU strongly rejects tax increases to finance measures to stimulate the markets and economic growth. Merkel’s plan for expansion includes boosting domestic consumption by 1.) Lowering income tax for the lowest income bracket to 12% from 14% and, 2.) Raising the threshold on the highest income tax rate (45%) to earners above 60,000 Euros from its current level of 52,552 Euros.  Additionally the party has stated that it will examine corporate taxes to ensure that they don’t over-burden firms.

 

The conservatives are against the introduction of nationwide minimum wage, promote stronger supervision of the banking sector, and support a strengthening of the EU’s Stability and Growth Pact, which underpins the Euro. Merkel holds that good ties with Russia are in Germany’s best interests and although the conservatives don’t want to build new nuclear plants, they argue that nuclear is an important part of the energy mix and want to extend legislation that would close existing plants in 2020.

 

 

Steinmeier and the Center-Left

 

The most significant challenger, Frank-Walter Steinmeier, is currently Merkel’s foreign minister, and is running under the Social Democrats’ slogan: the party of the people.  The SPD has been junior partners in the Grand Coalition since Merkel’s victory in 2005. Since 2005 popular support for the SPD in the Grand Coalition has waned, yet cannot be ruled out, especially considering their recent 2% gain in polling from 9/16 to 9/23, according to a Forsa/RTL poll.

 

Platform: Steinmeier’s most grabbing headline is a promise to create 4 Million jobs over the next decade. To help reduce the public debt burden, the SPD proposes raising income tax to 47% for top earners. To appeal to families the SPD offers to raise the tax break for each child per household by 200 Euros. The party hopes to cut the bottom income tax rate to 10% and calls for a nationwide minimum wage of 7.50 EUR/hour.

 

A big rallying cry for the SPD is energy policy, namely reducing the country’s dependence on oil and to get half of its power from renewable sources by 2030. On nuclear power the SPD stands with its policy (along with the Green party) to phase it out by 2020.  [At stake are stations run by Dusseldorf-based E.ON, RWE AG of Essen, Sweden’s Vattenfall AB and Karlsruhe-based EnBW Energie Baden-Wuerttemberg AG].

 

The SPD’s “Plan for Germany” entails programs to foster energy-saving and environmentally friendly industries that could employ two million people.  Further Steinmeier suggests that that healthcare system could employ an extra one million to cope with the country’s ageing population.

 

 

Forming Coalition Partners

 

Merkel’s preferred coalition partners remain the liberal, pro-business Free Democrats (FDP). Headed by Guido Westerwelle, the party has branded itself as representing the interests of small and medium-sized businesses, and has also been labeled the “party of the wealthy”.  Earlier this year the party saw its support surge to 18%, yet has settled down to 13% in the latest poll. The party has garnered support from the right as well as those dissatisfied with the efforts of the SPD in the Grand Coalition. While Westerwelle has voiced support for the CDU, it has not been ruled out that the FDP could join a coalition party with SPD and Green party depending on how the numbers shake out on Sunday.  The SPD, on the other hand, has voiced support of the Greens and Left party as coalition partners.  

 

Central to the FDP platform are tax cuts for families and middle income earners worth up to 35 Billion EUR and to simplify the tax system with three tiers: 10%, 25%, and 35%. The FDP wants to support small and medium-size businesses with 10-25% business tax, compared with the nearly 30% rate now. The party wants the state to sell its stake in the banks it has invested in. On foreign policy, the FDP calls for the withdrawal of troops in Afghanistan, a position not held by either the CDU or SPD, both of which see a continuation in near-term involvement.

 

 

By the Numbers

 

Undecided voters still remain aplenty. Due to the voting system there’s a potential to see a number of “overhang votes” in the Bundestag (Parliament), which could change the complexion of the winner and coalition formed.  Up until about two weeks ago, which coincides with the first dual and live televised debate (polls varied on the relative winner of the tv dual), Merkel and her preferred coalition partners (FDP) held a healthy majority of 50% support. Yet since then, the CDU has teetered slightly to the benefit of the SPD, putting into question the ability of the CDU and FDP to maintain a majority, which stands in and around 50% based on the voter tally.

 

Clearly the ruling coalition will have implications on the TAIL for Germany, the EU, and greater global landscape. Recent German sentiment indices, including the Gfk’s consumer confidence released today and Ifo’s business confidence released yesterday, both show steady improvement that should buoy Merkel’s credibility in strengthening the economy in these hard economic times (See Chart Below). Although the CDU looks to be in the driver’s seat, one cannot forget the sizable gap that Gerhard Schroeder (SPD) closed, despite losing, in the last elections of 2005.

 

We’re long Germany via the etf EWG in our model portfolio. We’ll have our sights on the election as it relates to our investment position.

 

Matthew Hedrick

Analyst

 

“SHOWMANSHIP” - MH GERMAN election 2

 


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