Merkel doesn’t need another election to appease markets

We discuss the ongoing fallout from the German election – including what it could mean for Europe, Brexit and the DAX – with Constantine Fraser from TS Lombard.

Germany is still yet to form a government, after its general election on 24 September failed to provide Angela Merkel with the mandate she needed. She and her ministers remain in office as caretakers.

So far, markets have taken the uncertainty in their stride. But looking into 2018, will we see volatility?

Should we be worried about the lack of German government?

At this stage, Merkel’s failure to form a new coalition isn’t that concerning. While a period of several months without a formal government would be unusual in the UK, in countries that rely on coalitions, like Germany, it can take a little while for a deal to get brokered.

It is perhaps surprising that the first attempt to strike a deal – between Merkel’s Christan Democratic Union of Germany (CDU), the Free Democratic Party (FDP) and the Greens – fell apart. But talks with the Social Democratic Party of Germany (SPD) will be beginning now.

How does AfD affect things?

Undoubtedly, the entrance of the far-right populist party Alternative for Germany (AfD) into parliament complicates proceedings.

A worrying development in itself, the rise of AfD – now the third largest party, with 13% of the vote – makes it harder for mainstream parties to form a majority coalition. Working with the AfD is unthinkable: even more so since its recent turn even harder to the right.

The rise of the AfD does raise the prospect of talks breaking down, which would mean another election in 2018. More likely, though, is that Merkel will form a minority government, which would be an unprecedented move, or reach a deal with the other major parties.

What does that mean for Europe?

For the first time in several years, there isn’t anything immensely urgent with which a German government has to deal. European politics have moved away from crisis point, and so Germany can afford to take a little while to organize its political situation.

If there is one drawback to Germany’s lack of government, it’s in Emanuel Macron’s plans to redesign the European Union and strengthen the eurozone. He needs a partner in Germany to work with, and as long as Germany remains in its current state, that won’t happen.

As for Brexit, negotiations are taking place between the UK and the European Commission – we’re not negotiating directly with Berlin, so Germany does not need to be involved on a day-to-day basis.

Will the DAX move if another election is called?

The sanguine attitude that the markets are taking at the moment is unsurprising. The political consensus is quite wide in Germany, but it’s only a matter of time before we see another stable government.

If we do see another election, then that picture remains unlikely to change too much. The outlook for the DAX and the euro looks fairly positive at the moment, and whichever government wins the election would have quite a lot of capital to play with – around €30 billion – that would probably get injected into the economy.

Watch the video at the top of the page to see the full interview with Constantine, including his thoughts on what Germany’s budget surplus might mean for the eurozone in the near future; whether we see the another election, a new compromise or a Merkel-lead minority government.

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