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.

The US Debt Ceiling: The Only Way Is Up

With Democratic lawmakers currently working to pass a multi-trillion dollar infrastructure bill, Republican senators have rediscovered their fiscal conservatism, which appeared to temporarily desert them during the Trump era. Given their minority status in both Congressional chambers, McConnell and co are relying on a tool that served them well under the Obama administration – the debt ceiling.

Republicans are demanding that Democrats reduce the scale of their planned infrastructure bill, whose price tag could be as high as $3.5 trillion. Without cooperation on that issue, Republican senators say they will refuse to cooperate on the issue of the debt ceiling. With Senate Majority Leader Schumer already ruling out the use of the reconciliation workaround, which allows for a simple majority for a bill to pass, the only path to resolution on this issue is through a normal Senate vote. This is critical, given the 60-vote requirement for regular bills to pass in the Senate – any debt ceiling resolution will require at least 10 red-state senators to break ranks and vote aye. The achievement of 60 votes is made yet more difficult by the potential for moderate Democrats to join their Republican colleagues in blocking action on the debt ceiling, with Joe Manchin having previously expressed his discomfort with the national debt.

Secretary Yellen now says that the US is likely to hit its debt ceiling on the 18th of October, meaning the federal government will be unable to fulfil its financial obligations after this date unless the ceiling is raised or suspended. This latter point is crucial and has been somewhat muddied by Republican spin on this issue. In reality, the debt ceiling is not about new government spending at all, it is about the government’s ability to fulfil spending promises that it has already made. Such obligations include both welfare payments and the maintenance of the national debt, meaning the potential economic consequences of this saga go far beyond the passage or non-passage of Biden’s infrastructure plan.

This is not the first time that Republican lawmakers have employed such a strategy, using it in both 2011 and 2013 to extract concessions from President Obama. In both of these cases, the concessions achieved were relatively minor, and the Republicans were eventually forced to settle for a moral victory at best. On top of that, the Democrats were able to avoid the bulk of the political backlash, with only 31% of the country saying that they were to blame for the crisis in 2011. So why use such a tactic again, given that it appears on the surface to have been so unsuccessful in times past?

  • Firstly, the political landscape has shifted drastically since episodes one and two of this trilogy. President Biden is a far less formidable political adversary than his former boss, particularly with regards to charisma and control over the media narrative. McConnell will be betting that his party can do a better job of deflecting blame towards the Democrats now they don’t have to compete with Obama’s overwhelming political celebrity. This strategy already appears to be paying off, with just 16% of poll respondents blaming the Republicans for the potential default.
  • Secondly, let us not forget who the intended audience of this political stunt really is – the Republican base. Having the support of even just 31% of the country is more than enough to achieve success in US elections given their historically low turnout, especially in the midterms which are now on the horizon. Turnout will be key in 2022 and this savvy political ploy will increase Republican chances of breaking the Democratic stranglehold on Washington next year by enticing conservative voters to the polls.

With all of this being said, the actual probability of US debt default is virtually zero. This Republican routine would be much more convincing if we hadn’t seen it twice before already. Does anyone really believe that it is a coincidence that all three debt crises have come in the year prior to a midterm election? Or that lawmakers (and their donors) with combined stock portfolios in the billions would seriously allow the devastating economic damage such a default would guarantee? The final nail in the coffin for the convincingness of such a threat is the Republican voters themselves. One of the best-kept secrets in Washington is that red states receive far more in net federal spending per capita than blue states. Whilst conservative voters may love the idea of national fiscal responsibility in theory, they are far more attached to personal financial solvency in practice. If the Republicans actually allowed this debacle to get to a point where the government stopped sending welfare checks, it would be their voters who would suffer the most, and the potential political benefits of this gambit would be nowhere to be seen.

This is not to say that no economic damage will be done or that no panic will occur. In 2011 a resolution was agreed just two days before the debt ceiling was due to be reached and resulted in a US credit rating downgrade and the loss of 1.2 million jobs by 2015. Rather, the very worst fears of the financial markets will not be realised – the debt ceiling will be raised and the infrastructure bill will pass in one form or another. But it’s going to get very messy and very noisy before we get there.

Outcomes:

  1. The panic and political manoeuvring will continue, and may even stretch beyond the October 18th date stated by Yellen, if the Treasury gets creative with their accounting. This uncertainty will hit markets and the real economy but this is a sacrifice Republicans are willing to make. McConnell looks set to trade a few points in the S&P 500 for a few points at the polls in the midterms – a bit of a bargain in political terms.
  2. Moderate Democrats will use this pressure as leverage against the left in their own party who are pushing for the headline $3.5 trillion bill to be realised. This will lead to further infighting among the Democrats which the left will likely lose, meaning a smaller infrastructure package than initially intended.
  3. The chances of the Democrats maintaining or expanding their control in Washington just went down.

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.

Blonde Money: Down the J Hole with the J Pow

There couldn’t be a better sign of the predicament in which the Fed finds itself than this year’s Jackson Hole symposium. The annual conflab for the world’s central bankers has suddenly gone from a long weekend of huntin’ and fishin’ in the wilds of Wyoming to a virtual one-day webinar, all thanks to the Delta variant. Hope springs eternal but Fear persists. Powell recently admitted as much himself, warning „the pandemic is still casting a shadow on economic activity, we cannot declare victory yet“. Not all of his colleagues agree. Recent Fed pronouncements have taken a distinctly hawkish turn, with the highest inflation rates in thirteen years scaring a number of FOMC members that they’re running the economy too hot. So which way will the J Pow turn when he goes down the J Hole – a dove who fears the job is not yet done, or a hawk who needs to remove monetary stimulus ASAP?

The rebel hawks

The Fed is famously not a democracy but neither is it purely the work of just the Chair. There is usually a centre of gravity that forms around the Chair, comprised of a few key lieutenants. Quarles and Clarida have taken on this role under Powell but even as he attempts to retain his dovish colours, they have pivoted to hawks.

  • At the end of May, Quarles made a speech embracing reflation, noting his optimism that ‘we are poised to enter a robust and durable expansion’.
  • At the beginning of August, Clarida sounded the alarm on inflation, noting ‘if, as projected, core PCE inflation this year does come in at, or certainly above, 3%, I will consider that much more than a „moderate“ overshoot… and I believe that the risks to my outlook for inflation are to the upside’
  • In between these two speeches, we got the infamous June dot plot, where the Summary of Economic Projections showed six more of them expected rate hikes in 2023 than they had the quarter before

Quarles and Clarida have read the room. And the room is now more worried about overheating inflation than anything else.

The FAIT Accompli

The Flexible Average Inflation Targeting regime introduced at last year’s Jackson Hole has barely survived one year. That framework was supposed to let inflation run high while the economy overheated, precisely so that it would reduce a shortfall in employment. And not just overall employment, but jobs for everyone. Brainard, Daly and Bostic have been at pains to point out that although jobs are coming back, they’re doing so more slowly for minority groups. But as Kashkari recently noted, the Fed must „pay attention to… the inflation side of our dual mandate“ as they „do not have the ability of targeting, for example, the Black unemployment rate“.

The tapering dove

So the inflation bear is at the door. The latest Fed Minutes show most participants “judged that it could be appropriate to start reducing the pace of asset purchases this year”. Given the painful experience of 2013’s taper tantrum, they will want to signal ahead of time what we should expect the taper to involve so that there are no nasty surprises. The market has helped them out on this front, given the US 10 year yield has fallen from 1.50% at the end of June to 1.25% now, giving ample room for yields to spike up without doing too much damage. So we can expect a further nudge towards a taper when Powell speaks at 3pm London time on Friday.

It will only be a gentle nudge. If he’s too aggressive in signalling the pace at which asset purchases will be reduced, the market will bring forward their expectation of interest rate hikes. Powell knows this is not the moment for tighter financial conditions. The Delta variant has swept across America, just as it has across the rest of the globe. It has already caused the New Zealand central bank to delay their first rate hike, given their meeting came the day after a snap lockdown began. Powell doesn’t want to frighten the horses. The American consumer is already wobbling: the Michigan Consumer Sentiment survey this month suffered the third-largest drop in its half-century history.

Powell also has a personal stake in the game. His term as Chair of the Fed expires early next year and his reappointment lies in the hands of Biden and the Senate Democrats. As BlondeMoney explained in our piece on the 8 Crucial Senators who hold the balance of power in a 50-50 split Senate, there is currently a monumental battle taking place for the soul of the Democratic Party. On the one side there are the progressives who mourn that Biden hasn’t been left-wing enough, and on the other the moderates who fear too large a price tag for such profligacy. None of them would be very happy if interest rates were to rise too quickly.

Powell then will strike the politically delicate balance for which he is renowned and emerge as a dove.

Das Leben nach Merkel: Die bevorstehenden Landtagswahlen in Deutschland

Nach vier langen Legislaturperioden tritt Angela Merkel als Kanzlerin ab. Merkel steht wie keine andere für Stabilität und hat sich zu einer Figur von nationalem und internationalem Ansehen entwickelt. Aber alles Gute hat irgendwann ein Ende (auch wenn wir zweifellos in einigen Jahren ihre Biografie lesen werden), und irgendjemand muss ihren Platz einnehmen. Die CDU hat es allerdings geschafft, mit Armin Laschet eine Reinkarnation der Kanzlerin zu ihrem neuen Parteiführer zu machen. Der einstige Europaparlamentarier und Journalist Laschet steht kurz davor, zu einem der mächtigsten Politiker der EU zu werden.

Aber noch ist es nicht so weit. In der CDU-Schwesterpartei CSU und ihrem Vorsitzenden Markus Söder hat er einen Konkurrenten. Dieser hat zwar mehrfach erklärt, dass sein „Job [als CSU-Vorsitzender] in Bayern liegt“[1], aber die Hälfte aller Deutschen betrachtet ihn als geeigneten Kanzlerkandidaten.[2] 65 Prozent der CDU/CSU-Anhänger halten Laschet nicht für einen geeigneten Kanzlerkandidaten (7 % erklärten, sie seien „definitiv“ für den neuen CDU-Chef, 11 % sind es „mehr oder weniger“).[3] Söder dagegen hat mit 79 % insgesamt die größten Zustimmungswerte. Für ihn ist es deshalb schwierig, weil man der CSU grundsätzlich nicht zutraut, im Kampf um die Kanzlerschaft erfolgreich zu sein. In der Vergangenheit wurden zweimal CSU-Politiker als Kandidaten der CDU/CSU nominiert, aber beide waren national nicht erfolgreich.

Herr Laschet muss sich natürlich auch mit anderen Parteien auseinandersetzen. Die SPD hat Finanzminister Olaf Scholz nominiert, der beim Impfprogramm bereits mit schonungslosen Schuldzuweisungen gegen die CDU vorgegangen ist und damit den Wahlkampf eingeläutet hat. In einer aktuellen Umfrage war Scholz nach Merkel und Söder der drittbeliebteste Minister. Laschet erreichte lediglich einen schwachen 7. Platz.[4]

Laschet hat allerdings noch die Chance, sich als würdiger Nachfolger zu bewähren. Am 14. März finden zwei Landtagswahlen statt, die für die Bewertung seines Erfolgs als CDU-Vorsitzender von entscheidender Bedeutung sein werden. Es handelt sich um die Wahlen in Baden-Württemberg und Rheinland-Pfalz.

Baden-Württemberg ist von größerer Bedeutung. Das Ergebnis in Deutschlands drittgrößtem Bundesland wird ein starker Indikator dafür sein, wie die jeweiligen Parteien auf nationaler Ebene abschneiden. Bei der letzten Landtagswahl konnten die Grünen den Sieg davontragen und zum ersten Mal in einem Bundesland stärkste Partei werden. Sie verwiesen die CDU auf den zweiten Platz.

Rheinland-Pfalz wird derzeit von SPD, FDP und den Grünen regiert. Bei den letzten Wahlen 2016 verloren die Grünen einen bedeutenden Anteil an Wählerstimmen, und die FDP kam mit in die Regierungskoalition.

Wenn die CDU ihren Vorsprung in den bundesweiten Umfragen in Prozentgewinne bei diesen Wahlen umsetzen kann, steigt die Wahrscheinlichkeit für eine Kanzlerkandidatur Laschets. Je weniger erfolgreich er ist, desto höher wird die Wahrscheinlichkeit, dass CDU/CSU Söder nominieren werden.

Bei einer aktuellen INSA-Umfrage kamen die Grünen in Baden-Württemberg auf etwa 31 %, die CDU auf 28 % (ein Prozentpunkt mehr als 2016), AfD und SPD jeweils auf 11 % und die FDP auf 10 %. In Rheinland-Pfalz liegen SPD und CDU hingegen gleichauf bei 30 % bzw. 31 %, die Grünen folgen mit 12 %[5]. Hier hat die CDU 0,8 Prozentpunkte verloren, aber den Abstand zur SPD verkürzt, die 2016 36,2 % gewonnen hatte.

Diese Zahlen sind für Laschet weder gut noch schlecht. Wenn die Ergebnisse so ausfallen wie in diesen Umfragen, dann wird sein Erfolg nicht ausreichen, um bei den Bundestagswahlen im September große Gewinne zu erzielen. Diese Ergebnisse wären aber auch nicht so schlecht, dass die Partei ihn ersetzen müsste. Er bietet genau die Zuverlässigkeit, die man von ihm erwartete, als die CDU ihn zu ihrem Vorsitzenden machte.

Auf Bundesebene ist der anfängliche Schub für Merkel aufgrund ihres Umgangs mit der Pandemie im letzten Jahr abgebröckelt, auch wenn die CDU in den Umfragen mit 32,5 % immer noch führt. Die Frage ist, mit wem sie regieren wird. Da die SPD und die Grünen jeweils bei 17 % stehen und die FDP bei 10 %, ist der Ausgang völlig offen. Als sicher gilt, dass niemand mit der zunehmend toxischen rechten AfD regieren wird, die bei 11 % liegt[6].

Ein Politiker, der Laschet als potentiellen Kanzlerkandidaten unterstützt, ist FDP-Vorsitzender Christian Lindner.[7] Wenn Laschet, der derzeit gemeinsam mit der FDP in Nordrhein-Westfalen regiert, zum Kanzlerkandidaten der CDU/CSU wird, könnte diese Kombination sich auch in der Bundesregierung durchsetzen. Wenn Söder sich durchsetzt, findet Deutschland sich wahrscheinlich eher in einer Koalition aus CDU und Grünen wieder. Der CSU-Vorsitzende hat sich in diesem Jahr intensiv um engere Beziehungen zu dieser Partei bemüht.

So oder so, die Ära Merkel ist vorüber. Damit entsteht ein Führungsvakuum in Europa zu einem Zeitpunkt, zu dem es keine bedeutende wirtschaftliche Krise erlebt. Der Wiederaufbaufonds ist für die EU-Institutionen ein großer Schritt nach vorn – aber er erfordert starke und einheitliche Führung, damit der Block keinen schweren Rückschlag erleidet. Selbst wenn Laschet Kanzler wird, ist es unwahrscheinlich, dass er die bevorstehende Herausforderung bewältigen wird.

[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

 

Can Super Mario do Whatever it Takes to Save Italy?

Italian politics has been nothing short of a soap opera. Take the formation of a new government in the middle of a pandemic, for just one example. Mario Draghi’s appointment following Conte’s confidence vote success was an unexpected plot twist in the already unpredictable storyline.

Now, of course, we’re all going to try and predict what happens next in the world of Italian politics. It’s a bit like betting on which Game of Thrones character is going to die next: someone will die, but try to guess who and how, and you’ll probably be wrong.

Still, Mr Draghi’s precedent as ECB President offers some signals as to what might be coming Italy’s way.  He has cultivated a well-respected public persona, having been credited for saving the euro following the 2011-12 sovereign debt crisis. La Repubblica (an Italian newspaper) found Draghi beat former prime minister Giuseppe Conte in all categories (see chart below) and 85% were “very or fairly” pleased with his appointment.[1]

Mario Draghi is a more popular figure than his rivals.

Source: La Repubblica (12 Feburary 2021)

His support doesn’t stop with the public; Italia Viva, Matteo Renzi’s party, firmly pledged its support early on in the process. The Democratic Party too agreed to work with Draghi (although, having strongly aligned with Conte, it may have been more of a truce). Nicola Zingaretti, its secretary, stated that “the united Democratic Party is on the field and ready to support this new challenge”[2]. Even Matteo Salvini, leader of the League, has pledged his support and willingness to “put aside ideology, prejudice, and arguments and get to work.”[3]

The only party to take an anti-Draghi stance is Fratelli d’Italia. They likely spot an opportunity to take the mantle of the only anti-establishment party now that the League and the 5 Star Movement have backed Super Mario. The cracks are already starting to appear for those parties, with the 5 Star Movement having a bit of an existential crisis at the moment (aren’t we all?). Their conundrum comes from the dilemma of backing Draghi – the establishment incarnate – or backing a crisis. 59.3% of party members might have voted to support the new executive, but a hefty 40.7% voted no.[4] Internally, the party is fractious.

Salvini is more willing to play along because he has his ulterior motives: a say in the Recovery Fund, and influence over the probability of an election. The League is at the top of the polls, and an election in the near future would be politically advantageous for Salvini. Draghi’s is the 7th government in a decade and survival for another two years with no election will be difficult.

In uniting opposing parties such as the League and the Democratic Party, Draghi has spread his unity government so broadly across the political spectrum that even his Super Mario reputation might not save him. How to navigate the reforms – ranging from the long-awaited judicial reforms to make civil trials shorter to a green economy transition[5] – that Brussels are expecting with such an eclectic array of ideologies, some of which directly clash? The new prime minister’s policies will be directed through an extremely narrow tunnel of what these parties are able to agree on.

And time is offering little mercy. Unemployment rose in December, reaching 9%. Among young people aged 15 to 24, it reached 29.7%.[6] In 2020, the number of Italians needing help to buy food rose by more than one million according to the farmers’ association Coldiretti. Tackling this is going to take not just vast fiscal stimulus, but also a level of political stability that Italy hasn’t seen in years – and in the midst of a pandemic. Draghi might support a “very strict regulation (of the markets) and a welfare state that offers protection to those caught out” [7], but the “whatever it takes” philosophy can only make a comeback with the support of parliament. Italian politics is infamous for its fickle nature, and it is inevitable that allegiances will change. Draghi’s challenge is to minimize this.

Many are optimistic of his role in both Italy and the EU. There is good reason for that; his ministerial appointments have focused on expertise and competence. The finance minister is in the safe hands of the deputy governor of the Bank of Italy, while the former head of the constitutional court, Marta Cartabia, has been given the position of justice minister.

But the huge amount of political instability that Draghi faces must not be understated. This is Italy and the drama is far from over.

[1] https://www.repubblica.it/politica/2021/02/12/news/draghi-renzi-sondaggio-piepoli-287178947/

[2] https://www.agi.it/vista-tv/video/2021-02-12/governo-draghi-zingaretti-pd-unito-pronto-sostenere-sfida-11378394/

[3] https://www.7colli.it/salvini-spiega-il-si-a-draghi-ci-sono-da-spendere-200-miliardi-voglio-esserci-video-30759/

[4] https://www.repubblica.it/politica/2021/02/12/news/governo-draghi-quirinale-_ministri-287181374/

[5] https://time.com/5938818/italy-mario-draghi-leading/

[6] https://www.istat.it/en/archivio/253024

[7] https://www.france24.com/en/live-news/20210209-how-long-with-italy-s-honeymoon-with-draghi-last

Blonde Money: Britain After Brexit

It only took four-and-a-half years, three prime ministers and two general elections. There is finally a Brexit Agreement. There is no doubt relief in many quarters that some form of agreement has been reached and for many months there is bound to be relief in financial markets also. However, this is a living document. It will take decades to work out what it all means for the British economy. Even then, it will change over time. Unless of course one or both sides decide to end it, which they can do, within the terms of the agreement, with 12 months’ notice. Parts of it can also be terminated, without the whole agreement being cancelled. That means more time, more prime ministers, and more elections, before the dust settles on what this all means.

But what do we know right now?

Inevitably the focus is falling on what it means for me and how I live and work.

  • Can I take my pet to visit granny in Northern Ireland?
    • Yes, but only with a new pet passport.
  • Can I live half the year in my second home in Provence?
    • No, only 90 days out of each 180.
  • Can I be a lawyer in Czechia?
    • Yes, but only if you’re resident.
  • What about being a lawyer in Austria?
    • Yes, but only if you’re not a resident.
  • Can I be a tobacconist in France?
    • No.

…and so on. These personal questions are consuming people’s energy and generating frustration. (For further details on these nuances, please consult this excellent primer from the Institute for Government).

They are just one of the inevitable frictions as the UK separates from the EU.

The other is supply chains. Despite the shrieking headlines over blocked up British ports, the truth is that supply chains were already under siege from the pandemic. We have effectively already seen a global No Deal Brexit, with borders slammed shut between nations for months. Companies have had to seek alternatives to build resilience and that process will continue.

There may be zero tariffs, but trade also requires documentation and paperwork. These “non-tariff barriers” always exist between nations. They need not prevent trade altogether. The EU still trades with the US, and vice versa, despite the lack of a free trade agreement between them.

Whether the Brexit-specific friction increases will depend on how much the UK wants to diverge. The more divergence, the more short-term pain for potential long-term gain. And the decision for that lies with the UK Prime Minister.

The success of all of this is not economic. It is political. It will depend on the leaders who take us forward for the years ahead.

And the Trade and Cooperation Agreement (TCA) takes account of this with its outline of arbitration methods if trade disputes should escalate. This is common with any trade agreement; the WTO uses their Dispute Settlement Body to sort out violations. But it’s not just a boring legal mechanism. It’s a potential political tool.

Let’s look at fish.

  • Yes, the starting point is a 25% increase in the value of the catch for the UK, phased in over 5.5 years, at which point annual negotiations kick in
  • But just look at the dispute resolution mechanism that kicks in if either side breaches these obligations
    • Preferential tariffs on fish and access to waters could be removed
    • AND so could tariffs on other goods
    • AND this would continue until an arbitration panel determines if it were a proportionate response
  • If either side terminates the Fisheries agreement, then that automatically cancels the trade, aviation and road transport sections of the deal

You can see where an aggressive leader might take this.

If you slap tariffs on my fish, then I slap them on yours. Then I slap them on other goods. Then you threaten to rip up the Fisheries Deal. Then both of us lose road and air access. Then the domestic law courts on each side get bogged down arguing the case… and we end up in a stand-off until one side concedes.

These arguments have already begun. The UK wants to diverge in certain areas, that was the point of leaving. Take the latest suggestion that the UK will loosen regulations on the 48-hour working week. The EU can complain if it’s seen to impact competition. But then the courts come in and everyone is bogged down until someone can decide what a proportionate retaliation might be.

This will not only rumble on but be deeply divisive at times. It has the potential to hurt economic growth in the short-term but increase it in the long-term. Europe’s economy has long faced structural challenges from an ageing workforce and sclerotic bureaucracy. Now the UK has escaped, it can forge a new path. Whether it is successful will depend on the politicians in charge.

Who won the first US presidential debate?

Blonde Money CEO and XRay regular Helen Thomas recaps what we learned – or didn’t – from the first debate of the US Presidential Election between President Trump and Joe Biden.

Don’t forget you can catch the latest insight from Helen every week on XRay.

 

US Presidential Election Weekly: Federal Reserve & US Election

Our resident political commentator, XRay regular and Blonde Money CEO Helen Thomas, takes a look at the latest big developments in the race for the White House. This week, the focus is on why the Federal Reserve’s switch to average inflation targeting could help Donald Trump in the polls over the coming weeks.

Don’t forget you can catch more great insight from Helen every week with Blonde Markets and our Election2020 Weekly shows on XRay. For all the latest election updates, including polling data, visit our US Presidential Election 2020 microsite.

US Presidential Election Weekly: Republican National Convention

Our resident political commentator, XRay regular and Blonde Money CEO Helen Thomas, takes a look at the latest big developments in the race for the White House. This week, the focus is on the Republican National Convention.

Don’t forget you can catch more great insight from Helen every week with Blonde Markets and our Election2020 Weekly shows on XRay. For all the latest election updates, including polling data, visit our US Presidential Election 2020 microsite.

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