- Chancellor Merkel is poised to become reelected Chancellor on September 24th
- Her coalition partnership remains uncertain, but there’s a clear runway for a pro-German business and EU agenda from the next government
- Alongside our Q3 Macro Theme of EuropeSlowing? we continue to suggest tactically shorting the EUR/USD and European equities, including the DAX, within our risk ranges
With the German general election two and half weeks away on September 24th, what’s changed on the campaign trail in recent weeks and who is the expected winner?
Put concisely, very little has changed on the campaign trail: Chancellor Merkel has maintained a commanding 12-16 point lead over her rival Martin Schulz of the Social Democrats (SPD) over the last eight weeks, and no person or political catalyst appears in her way to become chancellor for the 4th time.
The big question is who will Merkel choose to form a coalition government with? An outright majority from her Christian Democratic Party [a combined party of the Christian Democratic Union (CDU) and its sister party Christian Social Union (CSU)] appears highly unlikely.
Below, with a hat tip to the FT, is a convenient snapshot of the current polling of Germany’s main parties. A 50% or higher seat count is required to command a majority government, so here are the developing scenarios given a Merkel win:
- The overall coalition build depends on the performance of the fringe parties – there’s really only two parties that are going to command the most votes – Merkel’s Christian Democrats and Schulz’s Social Democrats. So in terms of coalition build, much depends on the performance of the fringe parties = Free Democrats (FDP), the Green Party, the far-left party (Die Linke), and the right-wing Alternative für Deutschland (AfD). As you can see from the chart below, these fringe parties are all polling around 9%. Merkel has already publically stated she will not form a government with Die Linke or the AfD.
- The promise of the Free Democrats (FDP) – we believe the Free Democrats, a business friend party, are Merkel’s favored coalition partner, but can they attain enough support? Should Merkel CDU & CSU party combined with the FDP to attain > 50% vote, we suspect the coalition shall be Merkel’s top pick. Unlike a coalition with the SPD (more below), the FDP is likely to be in her party’s pocket on most all international and domestic issues. Merkel has previously locked arms with the FDP as a junior coalition partner in her second term.
- “The Grand Coalition” – should FDP support wane in the election result, Merkel may be forced to turn back to the current coalition government, The Grand Coalition, comprised of her party plus the SPD. Unfortunately such a coalition would likely leave Merkel’s hands tied domestically and internationally.
- Jamaica Mon? – though unlikely, Merkel could opt for a coalition with the FDP and Greens. A three-way coalition has not been tested for some time, but should Merkel greatly oppose a Grand Coalition, and both the FDP and Greens poll favorably, it remains a possibility.
It’s worth calling out that the right-wing Alternative für Deutschland (AfD) party has had fits and starts of attraction over recent years, but has waned since it parted with its charismatic leader, Frauke Petry.
No German party is willing to work with AfD, but just how much representation AfD receives will be telling to political watchers.
With the failures of right-wing candidates in this year’s Dutch and French elections, there’s still heightened cultural issues across Europe, and fears of a ‘rise of the right’ alongside anti-EU and anit-Euro political platforms that persist. The next test on this score will come with the Italian election slated for the Spring 2018.
Hedgeye Investment Set-Up
We do not suspect that the German election will create waves in the broader financial market as a Merkel victory is priced in. We continue to suggest to tactically short the EUR/USD and European equities, including the DAX, within our risk ranges.
On the DAX we see an immediate term TRADE range of 11,936 -12,231 with a bearish intermediate term TREND; for the EUR/USD our immediate term TRADE range is $1.17-1.20 and we’ve shifted to a neutral intermediate term TREND.
For more on European equities, including the demographic headwinds facing the region, see our most recent commentary in today’s Early Look.
