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Markets can live with the German election

Elections in Germany, Italy and France could change the political structure of countries in the European Union, but the likely outcome is more of the same.

Elections in Germany, Italy and France could change the political structure of countries in the European Union, but the likely outcome is more of the same.

by
Charles Stanley

in Features

11.08.2021

The German election scheduled for 26 September should be an important event. The nation has an opportunity to choose a new Chancellor after Angela Merkel’s long period in office and could choose a new governing coalition for a change of direction.

Instead, the polls show a country undecided and out of love with all the main parties and the three leading candidates to be Chancellor. In a few recent polls Armin Laschet, the CDU/CSU conservative candidate, has 13-15% support; Olaf Scholz the socialist candidate has around 22%; and Annalena Baerbock, the Green, 13-15%. “None of the above” in some polls has more than half the vote. The latest two polls do show a bit more support for Mr Scholz.

The parties too are struggling to gain traction. Whilst the CDU/CSU is usually in the lead, it is always below 30%. The recent poll with the narrowest result has the CDU/CSU on 24% and the Greens on 22%. Most polls agree that the CDU is ahead, with the Greens often marginally ahead of the SPD for second place. Given that there will yet again be a coalition in the absence of any party popular enough to win a majority, the polls on preferred coalitions are even more split, with no single option attracting more than 13% in the most recent poll.

No clear way forward

This is not a US-style divided nation fighting itself in two major camps, but a hesitant and divided nation unsure of how to choose a better Parliament and a new Chancellor. Ms Baerbock, after an early good start, has underwhelmed – with her inexperience and the inaccuracies in her biography. Mr Laschet has still not lived down laughing and joking behind the President when he was making a solemn speech about those who had died in the floods. There is a general tilt to green themes, but there is also an underlying fear of lost jobs in the car industry and the possible upwards move in energy prices generally as decarbonisation bites.

It still seems likely that Mr Laschet will scrape home with underwhelming support as leader of the largest party in the Bundestag, but will have difficulty in constructing a coalition government given that it will need more than one additional party to get to a majority.

It is still too early to make a sensible forecast of what coalition may emerge. There will be time enough to think of that nearer the election or during the period of negotiations. What we can be reasonably sure about is that the Eurosceptic AFD will be excluded – and any emerging government will wish to stay close to the European Union (EU) and to work with them on their Green Deal policy. There is likely to be considerable continuity of approach, with the Merkel era forced on by the new Chancellor because of the political arithmetic of Parliament.

In Italy, things are rather different…

The government of Mario Draghi won a decisive confidence vote in his wide-ranging coalition because none of the main parties apart from Fratelli fancied their chances with an early general election.

The latest polls show the Fratelli party narrowly in the lead, the one party that opposed Mr Draghi’s government. They also show a centre-right coalition of Fratelli, Lega and Forza, with around 48% of the vote, garnering sufficient support to form a majority coalition should there be an election validating those voting figures. Such a coalition would be more critical of the EU than Draghi and the PD Party which held office previously. Maybe its programme would be to threaten more action by an angry Italy to get a better deal from the EU, but it might well fall short of any threat to leave either the Euro or the wider EU bloc. The flare points are most likely to be controlling immigration by failing to implement free movement policies properly and demands for more EU financial support in return for more cooperative conduct.

Markets sanguine

For the time being, markets are relaxed. The next Italian election does not have to be before June 2023 and the government is no hurry to hold it. Any opposition party wanting to force an election would need to persuade a majority of MPs to vote for it, which might be difficult given the state of many parties in the polls.

It may well also be the case that, as the centre-right parties think through what a coalition programme might look like, they may well mellow their position the closer they seem to office. The Lega party, however, has not joined the government it supports and may see advantage in shifting next year. The future of Mr Draghi as Prime Minister is not assured all the way until June 2023, as he may wish to move on. There are still some risks from the EU point of view.

Our base case remains that the leading countries in the EU will go along with a green-led EU policy and that Germany will continue to allow creeping transfer payments from rich to poor via the mechanism of the balances each country holds at the European Central Bank. There should not be a major challenge to the system, but nor will they be able to agree on a major reflationary package like the US on top of what has been agreed so far.

Germany remains suspicious of other countries wanting to spend its surplus or wanting to print even more Euro. This also assumes the French polls are right in judging the National Rally candidate Marine Le Pen will not win a second-round contest for President next spring.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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