Issue of the week: the impact of the German election
Investors are still betting on a revived eurozone. But with Angela Merkel weakened politically, is the optimism justified?
Having seen off populist threats in France and the Netherlands this year, the eurozone economy is enjoying its fastest growth in six years, said David Keohane and John Murray Brown in the FT. It is “luring money from foreign investors more accustomed to seeing the bloc wrestle with existential threats”: according to European Central Bank figures, non-residents bought s61bn of eurozone equities in July – the highest monthly amount since November 2012. As French President Emmanuel Macron proposed an ambitious set of EU reforms, one French asset manager, Bastien Drut of Amundi, remarked: “This is the first time I can remember talking about the construction of Europe when we’re not in a crisis.” But the prospect of a powerful “Merkel-macron axis” was made less likely by this week’s German election upset, which saw Angela Merkel win a fourth term, but hampered by the need to navigate a tricky coalition.
The stock market reaction to the election result was “muted”, said Daniel Grote on Citywire. But fund managers warned that the breakthrough of the far-right Alternative für Deutschland (AFD) party “could herald a choppy time for European markets”. The result challenges the market’s perception that German politics is highly predictable and stable. Far from being a case of “no change”, this election “could reshape Europe’s economy”, said Alex Brummer in the Daily Mail. Currency markets “are already showing jitters”: the pound is now at a ten-week high against the euro. “Merkel’s challenge is two-fold.” The presence of 94 Eurosceptic AFD politicians in the Bundestag “will raise questions about the scale of German assistance to an ailing European banking system”. Meanwhile, her likely coalition with the liberals and Greens “could lead to serious rethinking about industry”. Fortunately for Merkel, Germany ran up a £16bn surplus in the first half of the year. So if she needs to make deals with coalition partners, she has enough cash to make “Theresa May’s £1bn subvention to the DUP in Northern Ireland look minor league”.
The advent of a new set of “muscular kingmakers” in German politics could shift “the whole direction of energy strategy and the future of monetary union”, agreed Ambrose Evans-pritchard in The Daily Telegraph. That “spells trouble” for German energy and car stocks (the Greens want coal plants and internal combustion engines phased out by 2030) – and probably for the euro too. Still, compared with past travails, these anxieties pale into insignificance, said the FT. After all, no one is talking about the break-up of the eurozone any more.