investment insights
German elections: a chance to further consolidate the EU project ?
Lombard Odier Private Bank
Key takeaways
- Germany is set to elect a new government and change Chancellor for the first time since 2005
- Merkel’s CDU party is trailing in the polls. The vote is likely to result in a three-party coalition for the first time in more than six decades
- Germany’s priorities are central to EU policy: the leading parties are all pro-EU and support common approaches to fiscal spending
- We remain positive on European equities and believe the election will have little impact on the euro.
When German voters cast their ballots on 26 September, they will turn the page on almost 16 years of Angela Merkel’s chancellery. At stake is leadership of the European Union’s largest economy, accounting for more than one-fifth of the bloc’s total gross domestic product, and a position that has provided a central role stabilising a series of financial crises.
Chancellor Merkel has outlasted almost every political peer. When she took office in 2005, her contemporaries included George W. Bush, Jacques Chirac and Tony Blair. Only Russia’s Vladimir Putin and Turkey’s Recep Tayyip Erdogan are still in power.
After the election, Chancellor Merkel will fulfil her October 2018 promise to step down. The former East German physicist has steered Germany through four administrations and a series of economic emergencies, building a reputation for competent management in the process.
Her admirers credit Mrs Merkel’s leadership with steadying the European Union’s responses to the 2008 financial crisis and saving the eurozone in 2013’s debt crisis. Most recently in the Covid pandemic, Germany helped find a common fiscal solution, creating an historic rescue fund that lets the European Commission issue low-interest debt to prop up the bloc’s economies. Even if the recovery fund1 does not become a permanent EU mechanism, by ending the taboo on fiscal expansion, it creates a framework for emergency debt mutualisation.
Through her time in office, Chancellor Merkel has faced challenges to liberal democracy from Russia and China, witnessed the rise of the populist right in Germany, as well as in neighbours Hungary and Poland, the UK’s departure from the EU, and four years of an unstable US relationship with the Trump administration. The Chancellor has pressed ahead with the Nord Stream 2 pipeline to supply Germany with Russian gas and has made intermittent efforts to address the longer-term implications of climate change.
Critics accuse Germany’s longest-serving Chancellor since Konrad Adenauer of putting compromise before convictions. The country coined the verb ‘merkeln,’ to mean avoiding decisions and controversial statements. The outgoing chancellor is also criticised for failing to articulate a strategic plan for the EU and prolonging austerity in the wake of the eurozone debt crunch. At home, one of Mrs Merkel’s most controversial measures will be remembered as the refugee crisis of 2015, when she told Germans “wir schaffen das,” or we can manage this, and opened the country’s borders to asylum seekers. She then negotiated an EU deal in 20162 that has paid Turkey around EUR 6 billion to stop refugees crossing its borders with Greece. In 2019/20, Germany accounted for almost 25% of first-time asylum seekers3 into the EU.
Multiple Choice
The last federal election, in 2017, triggered more than five months of talks that eventually created an alliance between Chancellor Merkel’s Christian Democratic Union (CDU) with its allied Christian Social Union, and the Social Democratic Party (SPD). Four years later the country faces a choice of six major parties that will inevitably lead to negotiations for a coalition. German voters cast two ballots, one for a local constituency candidate, elected to represent the region directly to the national parliament, or Bundestag, and a second for a party that proportionally allocates seats.
Opinion polls suggest a three-party coalition is the most likely outcome. If accurate, it would be the first tri-party government since Konrad Adenauer led the CDU in a coalition from 1949 to 1957. To make the outcome even harder to foresee, the three largest parties, the joint CDU/CSU, SPD and Greens, have each led opinion polls at different times in recent weeks and no two parties look set to gather enough votes for a two-way and politically centrist alliance.
The CDU, which has been in government for more than five of the past seven decades, may end up excluded from power. Chancellor Merkel’s CDU successor, Armin Laschet, is polling poorly at a personal level, in line with the party. His supporters point to a track record of winning elections from behind.
Post-election impact
The SPD, as we publish, leads aggregated opinion polls with an estimated 25% of the vote. With the CDU/CSU on around 20% and the Greens with around 17% of the total, no two parties could form a government. In polls on the individual party leaders, who are not directly elected, SPD party leader Olaf Scholz consistently attracts more support from German voters than his two rivals combined (see profiles) and appeared to maintain that lead in a televised debate on 12 September. Anecdotal evidence shows that the race is tight. In an informal poll on my LinkedIn page, 43% of respondents predicted a narrow CDU/CSU win, compared with 41% expecting an SPD victory. At this stage, the most likely outcome would see the SPD’s Mr Scholz leading a coalition.
Profiles: Alternatives to Merkel
Olaf Scholz (Social Democrat Party, SPD) – Current German Finance Minister and Vice-Chancellor, the 63 year-old SPD leader is known as a technocrat, and is nicknamed ‘Scholz-o-mat’ for his lack of charisma. The former Hamburg mayor turned around his candidature this year and his party has now opened a poll lead ahead of Merkel’s CDU (and CSU alliance). As finance minister, Mr Scholz increased the minimum wage and changed labour laws, improving his popularity. He has advocated a common eurozone unemployment insurance programme, a tax on financial transactions, limits to public spending and a halt to new public debt.
Armin Laschet (Christian Democratic Union, CDU/CSU) - Born in Aachen on the Belgian/Dutch border, Mr Laschet is a fluent French-speaker and the leader of North Rhine-Westphalia, the largest state in Germany. Mr Laschet, 60, became a candidate for the chancellorship when he became CDU leader in January 2021. He has called for more fiscal generosity from other wealthy EU members in the pandemic. Mr Laschet has been criticised for his regional public health management during the Covid pandemic and aftermath of July’s flooding.
Annalena Baerbock (Greens) - The parliamentarian represents Brandenberg and supports the creation of a common EU foreign policy including a joint defence force, along with phasing out coal energy by 2030 and the introduction of carbon taxes. Only the second woman to run as German chancellor, at 40 years old, Mrs Baerbock is also Germany’s second youngest-ever candidate for the role.
The greater the support for the SPD, the greater the likelihood that Germany will become more fiscally generous. The party is in favour of making the EU’s recovery fund a permanent mechanism, and greater European integration. Domestically, the SPD and Greens agree on raising the minimum hourly wage (from EUR 9.6 since July, to EUR 12) and investing in renewable power and vehicles.
Germany’s economy is at the forefront of the EU’s economic recovery. The country’s GDP growth in the second quarter of 2021 reached 1.6% as spending picked up. German consumer inflation reached a 13-year high of 3.4% in August as the economy experienced accelerating demand and supply limitations as business activity normalised. In response to improving eurozone growth, the European Central Bank last week said that it will start to withdraw its emergency pandemic stimulus by slowing asset purchases.
The country’s benchmark government bond is more sensitive to the ECB’s policy changes than the federal election cycle. Germany’s 10-year Bund yielded -0.33% as we publish, from a high this year of -0.10% in May. As the region’s economies recover, we see the 10-year Bund entering positive territory, reaching +0.25% within the next 12-months.
We remain positive on the outlook for pan-European equities, which are benefitting from a rebound in cyclical growth. The implications for the euro look limited. While we may see some short-term volatility as winning parties negotiate a deal to form a government, the process poses no risk to the common currency because an eventual coalition should keep Germany both pro-European and fiscally stable.
While the personality leading Germany is about to change, the implications for European policy appear minimal. Germany’s next political leadership promises consistency at the EU level; the test will be how far an eventual new government drives common policy and whether it makes a long-term difference to the country’s long-standing objections to broader fiscal investments.
1 https://www.lombardodier.com/contents/corporate-news/investment-insights/2021/may/eu-next-gen-spending-takes-advan.html
2 https://ec.europa.eu/commission/presscorner/detail/en/IP_21_3438
3 https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Asylum_statistics#Main_countries_of_destination:_Germany.2C_Spain_and_France
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