Europe without Merkel? Investors parse ‘surprise’ Change in chancellor could loosen purse strings
LONDON/BERLIN:
A serious challenger to German Chancellor Angela Merkel is forcing global investors to parse another potential electoral surprise - removal of a key political constant through years of euro zone turbulence but also an end to Europe’s austerity bias. Martin Schulz’s appointment as the Social Democrats’ (SPD) candidate to run against Merkel has energized Germany’s September election race and those in his party daring to think they could unseat her.
He remains the underdog, but polls show him pulling closer by the day. One published on Thursday gave just a six point gap between Merkel’s alliance and the SPD. It said Schulz far outstripped her in one-on-one popularity. That is an unnerving prospect for some investors now accustomed to Merkel’s generally steady handling of Europe’s rolling crises that has contributed to triple-digit gains from German stocks to Portuguese bonds.
Just a few weeks ago, Larry Fink, head of the world’s biggest asset manager BlackRock, praised “the moral leadership Chancellor Merkel and Germany have played in an increasingly discordant world,” adding that he hoped it would continue. Schulz, a former European Parliament president, though, is looking to shake things up. Having seen his party wither during its time as the junior partner in a ‘grand coalition’ with Merkel’s conservative alliance, he is vowing to fight for fairer tax rules, higher wages, better education and to overcome the “deep divisions” that have fuelled populism.
Financial markets will see that as a nod to loosening the fiscal purse strings - no problem for a major economy with a large surplus and probably good for European stocks, although not so great for bonds if it fuels inflation. One lesson for investors from 2016 was that political shocks from the US election of Donald Trump and Britain’s vote to leave the EU did not crash markets. In part that’s because growth-friendly fiscal policies have come to the fore, away from an over-reliance on maxed out monetary policy.
A change in Germany could also help ease international strains about its budget and trade surpluses that surfaced again this week when Donald Trump’s trade advisor lashed out at the boost German exporters gets from a “grossly undervalued” euro. Another question for international investors will be what happens to Wolfgang Schaeuble’s tough stance on financial aid for Greece if the veteran finance minister is replaced. They will want to know if Schulz could end the push for austerity in Europe and take aim at the European Central Bank’s money printing programme and the sub-zero interest rates that have been crushing German savers.
“If you read between the lines, the Merkel administration has been very supportive of the ECB’s actions,” said Tim Barker, Head of Credit at Old Mutual Global Investors. “Were she not to be in power, would that support remain? We don’t know the answer.”
European DNA
Schulz is unsurprisingly pro-European. He told Der Spiegel magazine in 2012 the introduction of common ‘euro bonds’ across the single currency bloc would be the best way to reduce the interest burden on indebted countries in the south, though he said this was “a theoretical debate” as northern countries didn’t want them. Greek, Italian, Spanish and Portuguese bonds have all been underperforming this year on nervousness about ECB policy and rising anti-euro sentiment several countries including France. JP Morgan Asset Management’s Tilmann Galler said with “European DNA running through his political career,” Schulz might be the antidote.
Any rally could easily reverse if it opened the government borrowing spigot again in peripheral euro zone countries. “All things being equal austerity equals fiscal discipline, so if you reverse that, does that open the floodgates of supply?” said Old Mutual’s Barker. “You have to reassess you starting point for valuation. It could potentially be quite damaging.” The euro could swing too if Germany does start spending. The government has faced international pressure for years - including from the IMF and OECD - to boost economic demand at home to balance its exports. —Reuters