Germany Coalition Colours

After a wild ride in the polls where the CDU, Greens and SPD each took the lead one after the other in the months leading up to the election, the Germans eventually voted for None of the Above. Every party was left disappointed:

• The CDU posted their worst ever result at 24.1%
• The SPD came too close to the CDU/CSU for comfort, just ahead at 25.7%
• The Greens had hoped to clear 20% but managed barely 15% of the vote
• The FDP had hoped to come third but added less than 1 pct pt to their last result
• The Left barely scraped the 5% threshold

The two traditional large parties, the CDU and SPD, together failed to reach even 50% of the vote, demonstrating the frustration of German voters as they look for a new home.

Breakdown of German Federal Elections by party and vote share.

This decline in the two main parties means that for the first time in post-war Germany a majority coalition will require three parties. But which three will it be?

Traffic Light or Jamaica

Beep beep! We can’t help but think of frustrated drivers when we hear Germany might end up with a traffic light coalition. So-called because it would include the parties who are denoted by the colours Red (SPD), Yellow (FDP), and Green. But in a dramatic lurch off the autobahn, just switching out one large party for the other and bringing in the CDU/CSU (Black) would apparently leave us sitting in the Caribbean sunshine, with those colours representing Jamaica’s national flag.

Forget this dizzying array of colour combinations. You only need to look at the election results to know that the government will be going left and going green.

The two parties with the most momentum and therefore the most mandate to govern are the SPD and the Greens. The latter saw their vote share jump by two thirds since the last election, they’ve regularly polled in at least second place in the last three years, and they’ve firmly put environmental issues on the map. All the Chancellor candidates of the three biggest parties responded firmly that climate change is man-made when asked by Die Zeit magazine.

For the SPD, their man Olaf Scholz commands the most public support to become leader of Germany. Even one-third of CDU/CSU voters have to admit he would be a good Chancellor, according to a post-election poll from Infratest Dimap:

Graphics showing Infratest Dimap German Chancellor preference results.

That same poll shows that 60% of CDU/CSU voters think their candidate, Armin Laschet, has performed so poorly that he should resign.

Forming a coalition isn’t just about racking up the numbers: it must have public support as well. Just remember Pedro Sanchez in Spain who became Prime Minister in June 2018 despite his party holding only 84 seats. He was able to govern for almost a year before he had to go to the polls.

The CDU simply cannot claim enough support to be a senior party in government after results like these.

Christian Lindner – Court Jester, not Kingmaker

So why is the FDP still pursuing the CDU? This all comes down to their leader, Christian Lindner, who managed to resurrect the party after their disastrous election result in 2013 where they failed even to overcome the 5% threshold for parliamentary representation. He has certainly effected an impressive turnaround, enough that he almost formed part of the coalition after the 2017 election.

But he walked out of those negotiations, using words that will soon come to haunt him: “it’s better not to govern than to govern wrongly”. In doing so he forced the CDU back into a grand coalition with the SPD and subjected Germany to almost six months without a government. It became the straw that broke the camel’s back for Merkel, as she announced her retirement just seven months after that. This leaves Lindner a dangerous and unreliable coalition partner. If the SPD and Greens were to include the FDP they run the risk of always being subject to a potential walk-out, giving Lindner uncomfortable outsized veto power. The Green Party co-leader Habeck has already cautioned that a “traffic light” coalition is not just ‘red and green with a bit of yellow speckled on it’.

It might be bearable if Lindner were on the same policy page as the other traffic lights. But ideologically, he’s too far away from the SPD and the Greens, not least because he wants to reimpose the debt brake whilst the others understand that doing so would kill the economy. The co-leader of the SPD warned the morning after the election that ‘the FDP wants dramatic tax cuts, they don’t want to take out loans but they also want to invest. That’s voodoo economics, it doesn’t work’.

The Political Compass test (you can take it yourself here) places parties on the left-right economic axis, along with their position as authoritarian versus libertarian. You can see from their analysis of the German parties just how far out there the FDP sit:

Graphic showing political alignment of German political parties.

But the FDP think they hold all the cards, and will try to play off the CDU against the SPD. In overplaying his hand, Lindner will fail to compromise and so will not form part of the government.

The Super Grand Coalition

For the SPD, doing a deal with the FDP is not a price worth paying. Scholz would prefer a weakened CDU to an awkward Lindner. And so, after all the sound and fury of backroom deals and coalition quibbles, the SPD and Greens will be left with two choices: Either become Germany’s first post-war minority government; or bring back into the tent a humiliated CDU/CSU who will obey their radical policy platform.

The latter would be more likely to last the parliamentary term, not least given it represents the votes of almost 70% of the population. But to sell it to the public, we must first go through the rigmarole of entertaining the FDP as a potential option. It’s only by airing how intransigent they are to the public that the electorate will understand why the FDP can’t be part of the government.

This is also required to sell the eventual coalition to the parties themselves. Both the CDU and SPD are struggling with internal party strife. Scholz in particular needs to put his stamp on the SPD having lost out on becoming their leader just two years ago. Laschet might find he loses out entirely and is reshuffled away in order for the CDU to retain some scrap of power.

The colours have been nailed to the mast: Germany is going left and going green.

Monthly recap: German elections, hot UK inflation and NFP miss

We recap some of the key market movers from September in this monthly round-up. 

Monthly markets recap: September 2021

Germany waves goodbye to Angela Merkel in tight federal elections 

After sixteen years at the helm, Angela Merkel will step down as German Chancellor following late September’s closely contested German elections. 

It’s a hugely fragmented result. Pretty much all parties did worse than they thought. The SPD is the majority party, but they’re still very close to the CDU to really have a massive advantage. You could only separate them with a cigarette paper really.  

The Green’s, after topping the polls four months ago, came in third while the FDP came in fourth.  

Olaf Scholtz, the leader of the SPD, now has his work cut out trying to turn these close results into a working coalition. But what we’ve seen is what our political guru and Blonde Money CEO Helen Thomas calls a Code Red for Germany – that is a shift to the left with a bit of a green hint too. 

What the next German federal government looks like now is up for debate. The Green Party is probably going to be central, after doubling their Reichstag presence, but it’s out of the CDU and FDP to see who becomes the third coalition partner. See Helen Thomas’ election round-up below for more information. 

Nonfarm payrolls’ massive miss 

Nonfarm payrolls came in well below expectations in a wobbly US jobs report.  

In August, 275,000 new jobs were added to the US economy, falling far below the 750,000 forecast. 

The unemployment rate dropped to 5.2% while labour force participation stayed unchanged at 61.7%. Hourly earnings rose 0.6% in August, surpassing market predictions of a 0.3% rise. 

Jerome Powell and the Federal Reserve keeps a close eye on the jobs report. Labour market participation has been one of the key metrics the Fed has been looking at throughout the pandemic to decide on whether to start tapering economic support. 

We know that Jerome Powell and the Fed loves a strong jobs report. But we also know that tapering is on its way anyway – likely in November. August’s job data may not have impacted decision making too much, given the tapering signals were made long before its release.  

However, Fed Chair Powell still believes the US is still far from where he’d comfortably like employment to be. 

Speaking last week, Powell said: “What I said last week was that we had all but met the test for tapering. I made it clear that we are, in my view, a long way from meeting the test for maximum employment.” 

A recent survey taken by the National Association for Business Economics showed 67% of participating economists believed job levels won’t reach pre-pandemic levels until the end of 2022. 

UK inflation jumps 

August’s CPI data, released in September, showed UK inflation had reached 3.2%. That’s the highest level since 2012. 

Rising from 2% in July, the latest CPI print also showed a huge month-on-month rise in prices. Inflation soared well clear of the Bank of England’s 2% target – although the UK central bank did say it believed inflation would hit 4% in 2021. 

However, some market observers believe there is a risk that inflation will overshoot even the 4% level. 

The question is how will the BoE respond? A more hawkish tilt could be possible.  

Markets.com Chief Markets Analyst Neil Wilson said: “Unanchored inflation expectations are the worst possible outcome for a central bank they’ve been too slow to recognise the pandemic has completely changed the disinflationary world of 2008-2020. 

“My own view, for what it’s worth, is that the Bank, just like the Fed, has allowed inflation overshoots to allow for the recovery, but it’s been too slow and too generous. Much like the response to the pandemic itself, the medicine (QE, ZIRP) being administered may be doing more harm (inflation) than good (growth, jobs).” 

China intensifies its crypto crackdown 

Bitcoin was rocked towards the end of September after being hit with a body blow landed by the People’s Bank of China. 

The POBC has ruled that all cryptocurrency transactions in China are illegal. That includes all transactions made by Chinese citizens domestically and those coming from offshore and overseas exchanges. 

BTC lost over 8% and nearly dropped below the $40,000 mark on the news from Beijing. It has subsequently staged a comeback, but this latest move from China tells us a couple of important things about crypto. 

Number one: volatility is ridiculous. The fact that Bitcoin is still so susceptible to big swings on both positive and negative news shows it’s still very volatile. It seems hard to see a future driven by crypto right now if such price swings will be the norm. If this is the case, let’s hope it calms down in the future. 

Secondly, it’s that central banks are still wary of digital finance. In China’s case, it loves control.  

Beijing’s official stance is that cryptocurrency is a) illegitimate, b) an environmental disaster, and c) something it cannot control completely. Freeing finances from government oversight is the entire point of decentralised finance (DeFi) after all. In a country as centralised as China, that’s a no-go.  

China has pledged to step up its anti-crypto, anti-mining efforts further. This could cause major ripples for Bitcoin and the digital finance sector as a whole. A significant chunk of global token supply comes from Chinese miners. Someone else will have to pick up the slack. 

Oil & gas prices stage major rally 

A global gas shortage and tighter oil supplies pushed prices into overdrive towards the end of September. 

Natural gas, in particular, was flourishing. At one point, gas had climbed above $6.30, reaching highs not seen for three years. Basically, there’s not enough gas to go around. High demand from the UK and EU is pushing prices up, while the US, which is meant to be in injection season, is also suffering. Asian demand is also intensifying. 

In terms of oil, a supply squeeze coupled with higher demand caused by major economies reopening is putting a support under oil prices.  

Traders are also confident. Energy markets are the place to be right now. As such, trader activity appears to be pushing these new highs and is confident regarding the market’s overall strength. 

Goldman Sachs has also revised its oil price targets upwards. 

Goldman said: “While we have long held a bullish oil view, the current global oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts. 

“The current oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts.” 

Stocks up as markets look to Berlin & Washington

Stocks are higher in early trade in Europe, with the DAX jumping 1% at the open as it looks as though Germany is heading for a traffic light coalition – more left, more green. Deadlock for now but it’s all much of the same pro-Europe, pro-tax, pro-windmills type affair so who ultimately becomes Chancellor probably shouldn’t matter too much. Stocks in London was also up close to 1% and the FTSE 100 trades further to the top of the range above 7,100. Stocks pared some gains within the first half-hour of trading. Following a two-month struck last week it’s been a solid turnaround and shows there is not a lot of alternatives (TINA) still, though that starts to look like a different equation should bond yields continue to pick up. US futures are also pointing to a positive open on Wall Street later after last week’s rollercoaster saw the S&P 500 rise 0.5% and the Dow Jones 0.6%, breaking a three-week losing streak. I’d expect near-term volatility to persist, further chop and change and rotation as markets price for tighter monetary policy, with hikes in 2022, as well as persistent inflation. US 10 year yields trade above 1.44% this morning having touched the highest since the start of July, end of June last week.

Apart from Berlin, markets will be keeping an eye on Washington with the utterly ridiculous idea of a default on US debt, an unlikely government shutdown and a plausible collapse of Biden’s economic plans all being discussed. Speaker Nancy Pelosi said she expects the $1 trillion bipartisan infrastructure bill to pass this week, but also indicated that the $3.5 stimulus programme was almost certain to be watered down. Expect haggling aplenty and markets could be moving on headlines.

The Fed blackout period is over – so we can expect lots of jawboning from policymakers this week. On the slate today are Evans, Williams and Brainard. ECB chief Christine Lagarde (the Lady is not for tapering, the Lady is for recalibrating) is on the taper before them. Also watch for durable goods orders (seen +0.7%, core +0.5%).

Rolls-Royce shares on the up again, rallying 5%, after securing the mega US government contract to power the B-52 Stratofortress for the next 30 years. The F-130 engine will be manufactured at the company’s Indianapolis site, which has recently had a $600m makeover. On the back of some decent price action for the stock, the move confirms the breakout of the 2021 range can calls for further gains for the stock now the worst of the pandemic is behind.

BP trades 2% higher – I wouldn’t be tying this to panic buying and shortages on the forecourts, More likely down to continued rally for oil prices that has seen WTI touch $75 this morning.

Did the BoE really mean to suggest it could raise rates this year, before the end of the QE programme? That statement from the MPC last week, above all the other hawkish hints dropped, was the reason Sterling rallied, before easing back. If the markets are getting ahead of themselves with regards the timing of a rate hike , then Andrew Bailey can row it back when he speaks this evening.

GBPUSD traded around the 61.8% retracement of last week’s BoE-inspired rally, with the 50% area offering resistance to give us a range marker for this session. That 50% area coincides with the longer-term 23.6% retracement area at 1.3680. At the open we saw some bid come through for sterling as it broke free from this overnight range, hitting 1.3690 and looking for a breach of the 38.2% retracement of the near-term range at 1.370, before easing back.

Crude oil keeps on rallying, with WTI (Nov) breaking above $75. This move has real momentum behind it, as well as solid fundamental rationale as oil markets tighten. The tightness in the physical market means inventories are being drawn down around the world. That said, money managers trimmed their net long futures and options positions in the week to Sep 21st, according to the latest CFTC data. This is overall a positive for the duration of the rally since it indicates the price action is driven by more fundamental factors than just a speculative blitz. Goldman Sachs has raised its year-end Brent crude price target to $90, and $87 for WTI.

They say: “While we have long held a bullish oil view, the current global oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above consensus forecast and with global supply remaining short of our below consensus forecasts.

“The current oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts.”

July 13th peak at $75.50 offers the first test before we see another ascent at $77. Near-term support seen at the daily low at $74.70.

الأسبوع المقبل: هل تدفع بيانات نفقات الاستهلاك الشخصي الأمريكية تدريج الفيدرالي؟

على جدول أعمال هذا الأسبوع: نودع إنجيلا ميركل، حيث تواجه ألمانيا مستقبلًا دون قيادتها لأول مرة منذ أكثر من عقد. لدينا أيضًا مجموعة من إصدارات البيانات الضخمة من الولايات المتحدة تشمل معيار التضخم المفضل لدى الفيدرالي، وإحصائيات الناتج المحلي الإجمالي الكندي. هل ينتكس مرة أخرى؟

نعلم جميعًا أن الفيدرالي يحب بيانات نفقات الاستهلاك الشخصي. فنفقات الاستهلاك الشخصي هي معيار التضخم المفضل لديه، وهو معيار يمكنه أن يفرض ذلك التدريج الذي يُناقش دائمًا منذ وقت مبكر، بحسب تقرير أغسطس.

يُجمِع السوق إجماعًا عامًا على أن الفيدرالي سيبدأ التراجع عن دعمه الاقتصادي في نوفمبر أو ديسمبر، لذا فالسؤال الآن يدور حول رفع المعدلات. لقد رفع الفيدرالي بالفعل توقعات تضخم نفقات الاستهلاك الشخصي الأساسي لعام 2021 إلى 3.7% بدلًا من 3% في يونيو، فهم يدركون أنه آخذ في الارتفاع. لقد أعلن أيضًا الرئيس بويل إلى حد كبير أن الفيدرالي سيبدأ التدريج هذا العام. السؤال الآن هو ما إذا كان يتعين على الفيدرالي مراجعة هذه التوقعات لتصبح أعلى من ذلك، وما الذي قد يعنيه هذا بالنسبة لمسار رفع معدلات الفائدة. سيؤجج أي تقرير يتجاوز التوقعات هذا الأسبوع المخاوف من أن يكون الأمر كذلك.

هناك عوامل خارجية أخرى تلعب دورًا. ينبغي الإشارة أيضًا إلى أن قفزة يوليو البالغة 0.4% كانت متماشية مع التوقعات وأظهرت هدوءًا مقابل أرقام يونيو.

بلغ معدل التضخم العام في يوليو 4.2%. ومرورًا ببيانات مؤشر سعر المستهلك الصادرة حديثًا، ارتفعت تكلفة البضائع الاستهلاكية بنسبة 5.3% في أغسطس. كان هذا متماشيًا مع التوقعات. قد يكون هذا مؤشر أيضًا للاتجاه الذي تتجه إليه بيانات نفقات الاستهلاك الشخصي.

قال الفيدرالي إنه راض عن ترك التضخم يتجاوز هدفه البالغ 2%، حيث إنه يعتبر المستويات المرتفعة الحالية «انتقالية».

تخرج الولايات المتحدة من اقتصاد الجائحة، كما هو الحال مع كل الاقتصادات الكبرى، وتحاول أن تصل إلى شكل من أشكال الحياة الطبيعية. قد يكون الوضع هو أن التضخم الحاد سيواصل سفع الاقتصاد قبل أن يخمد ويختفي في 2022.

تصدر أحدث قراءات نفقات الاستهلاك الشخصي يوم الجمعة.

يرتبط بهذا ثقة المستهلك الأمريكي. منطقيًا، تشير الأسعار الأعلى إلى انخفاض في ثقة المستهلك. انعكس هذا على بيانات أغسطس، وقد يكون الحال هكذا عندما نحصل على بيانات سبتمبر بعد ظهر الثلاثاء.

انخفضت ثقة المستهلك في أغسطس إلى أدنى قيمة في ستة أشهر. حيث هبط مؤشر Conference Board إلى 113.8 من قراءة معدلة بلغت 125.1 في يوليو.

قالت لين فرانكو، المدير العام للمؤشرات الاقتصادية في Conference Board، في بيان لتفسر الهبوط، «إن المخاوف بشان المتحور دلتا، وبدرجة أقل، ارتفاع أسعار الغاز والطعام، نتج عنها نظرة أقل إيجابية للظروف الاقتصادية الحالية وتوقعات النمو في المدى القريب».

لقد سُجلت أكثر من 39 مليون إصابة بكوفيد 19 في الولايات المتحدة منذ بداية الجائحة وحتى الآن.

بعيدًا عن الولايات المتحدة، تطوي ألمانيا صفحة ولاية أنجيلا ميركل كمستشارة. بعد 16 عامًا تتنحى ميركل، مما يمنح انتخابات اليوم جوًا من التغيير الجديد المثير.

بحلول نهاية اليوم، ستحظى ألمانيا بمستشار جديد. قائد الحزب الديمقراطي الاجتماعي أولاف شولتس كان متصدرًا في الإعدادات للانتخابات، متجاوزًا المنافسين من الاتحاد الديمقراطي المسيحي والخضر.

ومع قول هذا، فإن الاعتقاد السائد هو أن الخضر، الذين كانوا في طريقهم لتحقيق أفضل نتائج لهم على الإطلاق قبل أن يذهب الألمان إلى استطلاعات الرأي، قد يصبحون الشريك الرئيسي للحزب الديمقراطي الاجتماعي في ائتلاف جديد.

خبيرتنا في الاقتصاد الكلي والسياسة هيلين توماس استعرضت الانتخابات الفيدرالية الأخيرة في ألمانيا. هل تثبتت صحة توقعاتها؟

بالحديث عن الانتخابات، صوت الكنديون مؤخرًا في موجة جديدة من التغيرات السياسية، مع تمسك رئيس الوزراء ترودو بمقاليد السلطة لفترة ثالثة. تهددت الأغلبية الليبرالية، وهو ما قد يدفع اقتصاد الدولة لتحريك الفائدة.

صدرت هذا الشهر أرقام الناتج المحلي الإجمالي الكندية شهر مقابل شهر بعد انكماش بنسبة 1.1%. دعت التقديرات إلى نمو بنسبة 2.5%، لذا حتى مع الانتخابات المبكرة التي أبقت ترودو في السلطة، فإن التحديات التي كانت تواجهه من قبل هي نفسها تحدياته التي يواجهها مرة أخرى.

بحسب محافظ بنك كندا تيف ماكلم، فإن التعافي الاقتصادي «سيتسمر في احتياجه نفس مستوى الدعم الاستثنائي». ليس متوقعًا حدوث أي تغييرات في السياسة الاقتصادية، بالرغم من الناتج المحلي الإجمالي الباهت الذي صدر الشهر الماضي. ربما نرى انعكاسًا هذا الشهر، أو تعكيرًا محتملًا للصفو بسبب حماسة الانتخابات.

أهم البيانات الاقتصادية لهذا الأسبوع

Date  Time (GMT+1)  Asset  Event 
Sun 26-Sep  All Day  EUR  German Federal Elections 
       
Tue 28-Sep  2.30am  AUD  Core Retail Sales m/m 
  3.00pm  USD  CB Consumer Confidence 
       
Wed 29-Sep  3.30pm  OIL  US Crude Oil Inventories 
       
Thu 30-Sep  2.00am  CNH  China Manufacturing PMI 
  1.30pm  CAD  GDP m/m 
       
Fri 01-Oct  8.55am  EUR  German Final Manufactuing PMI 
  1.30pm  USD  Core PCE Index m/m 
  3.00pm  USD  ISM Manufacturing PMI 

 

Germany: Code Red!

Farewell Angie, Hello Olaf! The SPD leader Olaf Scholz is in pole position to become the next Chancellor of Germany after the Phoenix-like resurrection of his party from the electoral wilderness. This is thanks to his appeal as the least worst option after the Chancellor Candidates of the other two largest parties spectacularly imploded over the course of the campaign. Firstly, the lamentable Laschet of the CDU managed to find himself caught on camera laughing whilst visiting a flooded town in July; then the Green Party’s Annalena Baerbock suffered a string of damning accusations including that she inflated her CV and plagiarised sections of her book. By comparison, the current Finance Minister looks like a safe pair of hands.

But his position as Chancellor isn’t guaranteed. Although the SPD are currently top of the polls with 25%, that’s a far cry from their historical average haul of 32% in all elections since reunification. The last time they were in power as the majority coalition partner (in 2005), they were capturing closer to 40% of the vote.

So they will certainly need a partner. In recent times that has come in the shape of the CDU/CSU, but with their vote share skidding around 20%, that is unlikely to generate enough seats to form a stable majority government.

Step forward the Greens. They’re set for their best ever result, even with the dip in form following Baerbock’s woes. At the last election they took 9% of the vote and current polls have them winning around double that. The SPD and the Greens therefore look assured for positions as the main parties in government.

So much, so left, so green. But on current polling, a third party will be needed. This is where the market will focus. Will they choose the business-friendly, budget-balancing FDP led by the charismatic Christian Lindner? Or will it be the ex-Communist Die Linke, the Left Party?

If it’s the latter, the spending spigots will be turned up to 11, and you’d expect Bund yields to soar while the Euro swoons at Communists entering the hallowed German government. If it’s the FDP, then with Lindner at the helms of the finance ministry, some fiscal rectitude will be restored, stabilising yields and the Euro.

After all, Lindner just gave a candid interview to the FT where he could not be more explicit about his priority for a balanced budget, explaining that ‘The prerequisite for us joining any coalition is that we can’t have tax increases and we respect the constitutional debt brake’. The debt brake was implemented following the bailouts from the financial crisis, writing into German law that the structural budget deficit must not exceed 0.35%.

But this law has already been suspended due to the pandemic. Germany has just clocked its largest budget deficit in thirty years. And once the spending spigots are switched on, they’re very hard to switch off. Not least when the central bank is hoovering up all that debt.

For this election, then, Germany is going left and going green. Lindner might be the only man left standing on a policy of prudence – and as such, be left out in the cold. His ideological bedfellows on the right, the CDU/CSU, have even had their wobbles over Germany’s famous “Schwarze Null” obsession (Black Zero, denoting a balanced book).

Merkel’s Chief of Staff wrote an op-ed to Handelsblatt in January this year admitting “the debt brake cannot be adhered to in the coming years”. Laschet promptly slapped him down but then cunningly created the concept of a “Germany Fund” to invest in infrastructure. Despite claiming that “we can’t allow a situation to arise where you’re circumventing the government’s debt management policy”, that’s exactly where he’s heading. The leader of his sister party, Markus Söder of the CSU, has even flirted with the idea of climate policies being ringfenced outside of the constitutional rules.

If even the pragmatic centre-right are considering extra spending on green measures, Germany’s future is clear. More spending, more deficits, more debt – and hopefully, as a result, more growth. This is a paradigm shift from Europe’s largest economy, and, as such, will change the direction of the Eurozone. Having struggled with deflationary demons, the inflationary chickens will now come home to roost. If they’re accompanied by growth, then the Eurozone might just finally shake off its sclerotic shackles and become the tiger economy for the 21st century.

There is one more hurdle it must overcome. For the Eurozone to thrive, its monetary and fiscal institutions must become more integrated. Merkel was always committed to “ever closer union”, and Laschet, as a former MEP, even more so. Olaf Scholz has gone a step further; he greeted the massive Next Generation EU fiscal stimulus as its “Hamiltonian moment”, referring to when the United States federalised the debts of individual states in 1790. The Greens are similarly on board. But Die Linke, the FDP and the AfD have reservations about the European project, or at least the need to preserve some German freedoms within it. So even if the FDP join a SPD+Greens coalition, tempering fiscal profligacy, they will raise the risk premium for German assets due to their stance on Eurozone institutions.

It is Code Red for Germany after September 26th. The end of Merkel leads to the beginning of much more risk.

Life After Merkel: The upcoming German regional elections

After a long four terms in government, Angela Merkel is stepping down as Chancellor. The physical embodiment of stability, Merkel has built herself a successful persona of national and international renown. But all good things must come to an end (although no doubt we’ll all be reading her biography in a couple of years), and someone must take her place. The CDU have nevertheless managed to find the Chancellor’s reincarnation in its new leader, Armin Laschet. Once an MEP and journalist, Laschet is now on the brink of becoming one of the most powerful politicians in the EU.

But he’s not there yet. Inside the CDU’s sister party the CSU, the looming figure of Markus Söder hangs over him. Despite having repeatedly claimed that his “job [as leader of the CSU] is in Bavaria”[1], half of Germans consider him a suitable candidate for chancellor.[2] 65 percent of CDU/CSU supporters consider Laschet unsuitable as a candidate for chancellor (7% said they were “definitely” in favour of the new CDU boss while 11% were “more or less” so).[3] Söder, however, receives the greatest approval with a total of 79%. His challenge comes from fundamental distrust in the CSU to successfully secure the Chancellorship; two CSU politicians have been nominated as the CDU-CSU candidate in the past, but neither won the big national prize.

Then, of course, Mr Laschet has to worry about the other parties. The SPD has already nominated Olaf Scholz, the finance minister, whose ruthless blaming of the CDU for the vaccination program has signalled the fight to come. In a recent survey, Scholz was the third most popular minister after Merkel and Söder. Laschet, on the other hand, came in at a measly 7th place.[4]

Still, Laschet has a chance to prove himself as a worthy successor. On 14th March, two regional elections will take place, both of which will be vital in judging his success at the head of the CDU. One is in Baden-Württemberg and the other is in Rhineland-Palatinate.

Baden-Württemberg is the more significant. As the third largest state in Germany, the result will be a strong indicator of how each party is doing on a national level. In the last regional election the Greens stormed to victory, for the first time becoming the largest party in any German state. They pushed the CDU into second place.

Rhineland-Palatinate is currently controlled by the SDP, FDP, and the Greens. At the last election in 2016, the Greens lost a significant chunk of their support, letting the FDP into the ruling coalition.

If the CDU can translate their national poll lead into gains in these elections, then the more likely that Laschet can be sure he will be put forward as Chancellor Candidate. The less successful he is, the more likely Söder will be the CDU/CSU’s nominee.

In a recent INSA poll, the Greens are on around 31% of the vote in Baden-Württemberg, the CDU 28% (a 1% increase from 2016), the AfD and SPD on 11% each and the FDP on 10%. Meanwhile, the SPD and CDU are neck and neck in Rhineland-Palatine at 30% and 31% respectively, with the Greens trailing behind at 12%[5]. Here, the CDU has dropped its vote share by 0.8%, but has narrowed the gap with the SPD, who won 36.2% in 2016.

These numbers are neither good nor bad for Laschet. If the result is in line with these polls then he’s not done well enough to be confident of a huge groundswell of support in the September national election. But nor will it be bad enough for the party to replace him. He is exactly the safe pair of hands that he was expected to be when the CDU made him their leader.

On a national level, the initial boost for Merkel on her handling of the pandemic last year has ebbed away although the CDU is still ahead of the polls at 32.5%. The question is who will they govern with? It’s up for grabs with the SPD and the Greens both at 17%, and the FDP at 10%. One certainty is that nobody will rule with the increasingly toxic right-wing AfD at 11%[6].

One politician who is supportive of Laschet’s potential to be chancellor is FDP leader Christian Lindner.[7] With Laschet – who currently governs North-Rhine Westphalia with the FDP – as CDU/CSU Chancellor candidate, this combination could be carried into the federal government. If Söder were to come out victorious, Germany is more likely to find itself in a CDU-Green coalition; the CSU leader has spent much of this year attempting to tighten relationships with the party.

Either way, the Merkel era is over. That is going to leave a leadership vacuum in Europe at precisely the time that it is facing not a significant economic crisis. The Recovery Fund is a huge step forward for the institutions of the EU – but it needs strong and consistent leadership to ensure the bloc doesn’t take a huge step back. Even if Laschet does become Chancellor, he is unlikely to be able to meet the challenge ahead.

[1] https://www.bild.de/politik/inland/politik-inland/markus-soeder-im-interview-jetzt-ist-nicht-die-zeit-fuer-lockerungen-72168988.bild.html

[2] https://www.spiegel.de/politik/deutschland/armin-laschet-markus-soeder-und-die-kanzlerfrage-umfrage-zeigt-klare-vorteile-fuer-soeder-a-cf352340-9dd9-4371-9dd4-7ab06ab7da9f

[3] https://www.spiegel.de/politik/deutschland/armin-laschet-markus-soeder-und-die-kanzlerfrage-umfrage-zeigt-klare-vorteile-fuer-soeder-a-cf352340-9dd9-4371-9dd4-7ab06ab7da9f

[4] https://de.statista.com/statistik/daten/studie/1817/umfrage/noten-fuer-spitzenpolitiker/

[5] http://infratest-dimap.de/umfragen-analysen/bundeslaender/rheinland-pfalz/laendertrend/2021/februar/

[6] https://www.wahlrecht.de/umfragen/insa.htm

[7] https://www.spiegel.de/politik/deutschland/fdp-chef-christian-lindner-ueber-armin-laschet-cdu-laschet-kann-kanzler-a-20455c33-1e47-4bfa-8a22-6c851197f043

 

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