Are the mar­kets right to ig­nore the Ger­man elec­tion?

Financial Mirror (Cyprus) - - FRONT PAGE -

The Euro closed trad­ing last week (Septem­ber 1) high against both the dol­lar and ster­ling, push­ing the $1.20 mark for the first time in two and a half years. Given that the fi­nan­cial mar­kets have spent the last 12 months rid­ing the waves of po­lit­i­cal un­cer­tainty and shock elec­tion re­sults, you could be for­given for think­ing this news her­alds the start of a calmer pe­riod. But the EU still has one ma­jor hur­dle left to over­come.

The Ger­man elec­tion, sched­uled for Septem­ber 24, has the po­ten­tial to squeeze the re­cent EUR gains. For the mo­ment, the mar­kets seem un­con­cerned, and happy to as­sume that An­gela Merkel will re­main firmly at the tiller of the eu­ro­zone’s lead­ing na­tion. The polls cer­tainly sup­port this the­ory, and Merkel’s Chris­tian Demo­cratic Union (CDU) and its coun­ter­part, the Chris­tian So­cial Union (CSU), are ex­pected to main­tain power; a ZDF poll pub­lished on Fri­day shows the two lead­ing with 39% sup­port. An all-out ma­jor­ity in the Bun­destag is un­likely – the CDU and CSU cur­rently rule in coali­tion with the So­cial Demo­cratic party (SPD); it re­mains to be seen which of the smaller par­ties will have enough clout to be a part of the coali­tion.

To as­sume that Merkel will win and the sta­tus quo main­tained, is nar­row-sighted at best. The ex­am­ples from the EU ref­er­en­dum and US elec­tion in 2016 show that in­vestors should not un­der­es­ti­mate the risks of un­der­pric­ing head­ing into a vote. Merkel may have a sig­nif­i­cant num­ber of eco­nomic and so­cial achieve­ments un­der her belt, but th­ese have a ten­dency to be over­looked by vot­ers.

The re­ported 15-20 point mar­gin, may be enough to al­lay mar­ket fears for now, but Merkel is thought to face stiff op­po­si­tion from the SPD’s new leader (and for­mer Pres­i­dent of the Euro­pean Par­lia­ment) Martin Schulz. His ap­point­ment in Jan­uary boosted the pop­u­lar­ity of the party, mak­ing it a true con­tender for the first time in this elec­tion cy­cle.

A loss for Merkel, or a Theresa May-style limp­ing vic­tory, would have a sig­nif­i­cant i mpact on fi­nan­cial mar­ket fluc­tu­a­tions, and quite pos­si­bly on Euro­pean eco­nomic health. The im­proved sen­ti­ment around Europe this year makes it the des­ti­na­tion of choice for in­vest­ments, with ma­jor Euro­pean eq­ui­ties and the Euro en­joy­ing a re­vival.

French Pres­i­dent Em­manuel Macron may find him­self in the un­ex­pected po­si­tion of be­com­ing the pre­mier force in the Euro­pean Union. With an in­te­gra­tionist agenda that ri­vals that of both Merkel and Schulz, Macron could be ex­pected to ex­pe­dite plans for com­mon tax poli­cies and a eu­ro­zone spend­ing min­istry. He would also en­sure that the di­vorce set­tle­ment for the UK is tough, and any con­flict at the Brexit ne­go­ti­a­tion ta­ble will only add to the un­cer­tainty that has al­ready contributed to GBP losses.

Po­lit­i­cal com­men­ta­tors agree that the Ger­man pub­lic has very lit­tle ap­petite for re­form, and the global ex­pec­ta­tion is that come Septem­ber 25, An­gela Merkel will once more be safely en­sconced in the Chan­cellery. It’s an out­come the fi­nan­cial mar­kets seem to be buy­ing into.

Whether that’s wish­ful think­ing or well-founded con­fi­dence re­mains to be seen; but given the re­sults of other ma­jor elec­tions and the his­toric EU ref­er­en­dum, it would hardly sur­prise me if in three weeks’ time, I found my­self writ­ing about the shock Ger­man vote and in­creased mar­ket volatil­ity.

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