All Quiet on The German Front

The German elections are just two weeks away now and so far, aside from a few personal attacks on CDU’s Merkel by SPD’s Schulz, there has been little excitement to note. Current polling results continue to show a strong lead for the incumbent Chancellor’s party with the SPD in second place. The only real unknown element to the outcome will be the coalition formed, with a range of options available. At this stage, it appears that the most likely outcome will be political gridlock in the short term as negotiations begin towards agreeing on a new coalition government.

 Will AfD Take Second Place?

While political gridlock might sound like a negative thing, this outcome is actually likely to be bullish for European markets. At the start of the year, there was a high level of concern surrounding the growing wave of populist support emerging across the eurozone. In Germany, this populist support is focused on the AfD party who narrowly missed taking seats in the Bundestag in 2013. However, consolidating and developing their support at a local level the party is currently fighting it out with far-left party Die Linke for a coveted third place which would see them finally taking a few seats in the Bundestag.

Although the party is only small and the representation in the Bundestag would be equally limited, the symbolic victory would be huge and would certainly drive a surge in support for the party. However, it is important to note that over the year AfD’s support has actually waned due to internal disputes and leadership changes whereas the other smaller parties such as the FDP, have seen their support rising steadily in the polls.

CDU/CSU Expected To Win But Without A Majority

Although Merkel’s CDU/CSU party is forecast to comfortably gain the most vote, they are not expected to achieve an outright majority which means that they will need to form a coalition government once again. One possible option is to simply continue the grand coalition with the SPD which has been the status quo in German government since 2013, extending four years’ worth of political gridlock.

However, the CDU/CSU could opt to form a coalition with the other, smaller parties such as the FDP or the Green Party. The FDP, for example, are more ideologically aligned with the CDU/CSU than the other parties and a coalition with the could lead to a more active government although it is worth noting that when the two were in government together from 2009 – 2013 they failed to pass any major legislative changes, which means another coalition between these two could be equally as ineffective.

Undecided Voters  Still Pose A Risk

It is important to highlight that various polls continue to show a high level of undecided voters in this election. For the market, this is a worrying sign given the surprise outcomes we saw in both the Brexit referendum, the UK elections and the US elections. However, with the CDU/CSU maintaining a comfortable double-digit lead over the nearest runner up, it would take a significant number of those undecided voters swinging in the same direction to topple the current favourite and unsettle the German political landscape, which is not the expected scenario.

Gridlock Good For European Markets

A victory by the CDU/CSU without a clear majority, leading to the formation of another coalition government should be taken as a positive sign by markets as it marks the passing of yet another eurozone election without a populist, Eurosceptic party taking control. This keeps the strength of the eurozone intact and takes any pressure off the ECB to adjust policy course under political pressure which should keep investors focused on the broader themes driving the eurozone currently such as solid economic growth and strengthening corporate profits which should underpin the ECB’s removal of accommodative monetary policy over the next year.