Beyond the election: What’s next for Merkel and Europe?

October 09, 2017 08:00
Coalition talks may take several months, as Chancellor Angela  Merkel faces the complexity of securing a coalition with two other parties. Photo: Reuters

While the reelection of Angela Merkel as German chancellor for a fourth term provides the reassurance and status quo that many investors sought, the rise of the nationalist right has weakened her hand and she faces the challenges of securing a coalition.

• Angela Merkel’s re-election as German chancellor is a vote for the status quo, despite growing far-right support.

• With Merkel’s hand weakened, the final shape of any coalition government may determine her approach on Europe and other issues.

• The Germany results may contribute to investors’ ongoing concerns about political risk as Europe continues its election “super cycle”.

On the face of it, the 2017 election did not represent a sea-change in German politics: Germany’s centre-right Christian Democratic Union (CDU) and Christian Social Union (CSU) parties again garnered the largest share of the vote, securing Merkel a fourth term. But this came against the backdrop of a fall in support for the CDU/CSU bloc, and the advances made by the anti-immigration Alternative for Germany (AfD) party, weakening Merkel’s hand.

With millions of voters deserting the mainstream parties, support for Merkel’s conservatives slipped to about 33 per cent of the vote – their lowest showing since 1949. In all, more than one in five Germans voted for either far-right or far-left parties – reflecting the populist, anti-immigration trend seen elsewhere.

Germany’s equity markets opened slightly down following the election results, emulating a similar decline by the euro. Investors concerned about geopolitical turmoil had looked for reassurance that Germany’s pro-European Union leadership would remain in place. Attention will turn to the type of coalition that Merkel is able to construct. This will, in part, determine the approach she is able to take on EU policy and other areas.

Coalition talks may take several months, as Merkel faces the complexity of having coalition talks with two other parties. The new government is likely to coalesce around agreement on climate policies, push for digitization, improvement of the educational system and a clear immigration policy. Tax cuts are also on the agenda, but there’s no guarantee that agreement on any of these issues will come quickly.

Investment implications

From our point of view, these results should have little impact on Germany’s economy, which should continue performing well. A weaker euro, on the back of the outcome, could be positive for exporting companies. We expect that Germany will continue to be governed by a pro-European, Merkel-led government, and the likelihood remains of a tight Berlin-Paris axis going forward. The results won’t, however, entirely calm residual concerns about political risk in Europe, particularly as the region continues its election “super-cycle”.

What’s next for Germany and Europe

Merkel’s achievement in being reelected as chancellor is not to be underestimated, and the scale of her drop in support was far from fatal. But even as she settles into a fourth term, thoughts will turn to the future. Germany will need a succession plan urgently, particularly against the backdrop of the advance of the nationalist right. In the immediate term, Merkel will be under pressure to address issues such as immigration and security that have driven AfD support. Continued dissatisfaction among the electorate around these issues could easily lift the AfD vote further in future elections.

Furthermore, Europe’s continuing election “super cycle” may spell trouble for the euro and/or the EU:

• Austria’s national legislative elections on Oct. 15 could be an outlet for rising anti-EU feelings.

• Italy’s vote in the spring of 2018 is troubling; the country’s challenging economic straits could lead to a strongly anti-Europe result.

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As Global Strategist at Allianz Global Investors, Neil Dwane is responsible for presenting strategic house views and overseeing the Economics and Strategy Research teams.