Are the markets right to ignore the German election

September 18, 2017 09:40 AM

The German Election, scheduled for 24 September, 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 U.S. 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 impact 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 25 September, 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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