With the end of Angela Merkel’s legacy and an uncertain future for German politics, the Franco-German alliance is at risk and with it the future of the EU. According to EU expert Mujtaba Rahman, the uncertain results of the German election will lead to a long period of turmoil in the EU as the bloc will be left without a clear voice from Berlin on how to tackle some major issues.
The head of Eurasia Group’s Europe practice also argued that as France approaches its own period of political uncertainty with next year’s presidential election, the strong partnership between the two countries at the core of the EU will fade.
He tweeted: “Germany now faces weeks – if not months – of political uncertainty which creates all sorts of policy risk for Europe.
“A real danger in the months ahead is a lengthy period without a new voice of any kind in Berlin, just as France plunges into an uncertain election of its own.
“Because EU faces three extremely big, complex policy questions in the third and fourth quarter this year – over Rule of Law issues with Poland and Hungary; the EU’s fiscal orientation in 2023 and how to manage UK escalation over the Northern Ireland Protocol – which are crying out for a political steer.
“But with a lame-duck Government now in Berlin, soon to be followed by same in Paris, no major EU policy decisions are likely under either.
“This risk is the problems fester, escalate and subsequently become harder to resolve.”
After Finance Minister Olaf Scholz’s centre-left Social Democrats (SPD) narrowly defeated the ruling Christian Democratic bloc (CDU/CSU) in Sunday’s election, both parties will woo the Greens and the pro-business Free Democratic Party (FDP) to form a coalition.
Based on the colours of the parties involved, a potential Social Democrat-led alliance has been dubbed the ‘traffic light’ coalition, with a conservative-led one named after the flag of Jamaica.
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And for investors following the negotiations, that may be the main difference between the two groupings. Apart from the FDP which wants a speedy return to the debt “brake” capping new federal borrowing, all the other parties have expressed some willingness to spend more flexibly.
“It seems that the Greens are going to be part of the coalition … So whether it’s a Jamaica or a traffic light coalition, that means more expansionary fiscal policy,” said Anna Stupnytska, global macroeconomist at Fidelity International.
She saw the ‘traffic light’ option of the Social Democrats, Greens and the FDP as the most positive option for markets and “a real change from politics of the past several decades”.
Higher spending from this coalition is expected to provide a bigger boost to public investments, supporting economic growth.
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The CDU has led Germany since 2005, a period characterised initially by stringent austerity both at home and across the eurozone, which critics say has depressed public investments.
But the COVID-19 pandemic hitting in March 2020 gave way to greater spending.
Last year’s spending burst was financed with record new borrowing of 130 billion euros, rising up to 240 billion euros in 2021. Constitutionally mandated borrowing limits will likely be suspended for the third year running in 2022 to allow 99.7 billion euros in borrowing.
Thomas Kruse, chief investment officer for Germany at Amundi, said an SPD-led coalition could unleash more government spending but a conservative-led grouping was likely to stimulate private sector investment via tax cuts, favouring equities either way.
Given the Greens will be key in either coalition, Kruse is particularly seeking opportunities in companies that benefit from a speedier green transition.
“In general, there will be a lot of spending,” he said.