Europe’s Biggest Election: Part 1 – A Primer

If you haven’t heard mention of it in the news, or read about it in the papers or your portfolio manager’s commentary, there’s an election coming up in Germany. It’s important too! The outcome of this election has implications well beyond Germany, and well beyond Europe. In this post, we’ll look over the basics of the election, so that you’ll know how to make sense of the results when they come later this month.

First, why is this election so important? There are a couple of main reasons. Germany is one of the main centres of gravity for the European Union. Their export-driven economy is the engine driving a nascent EU recovery, and Germany’s ability to continue churning out that growth is highly interrelated with the domestic policy agenda of the government. Secondly, Germany’s one of the big wheels in the EU and almost nothing gets done without its approval. Bailouts, budgets, banking regulators…all of these need Germany’s tacit stamp of approval. Most European countries with austerity budgets probably have Germany to thank (some would say “blame.”) Perhaps the best way to sum up Germany’s influence is “as goes Germany, so goes the rest of the EU.”

The election on 22 September will almost certainly see Germany’s current chancellor, Angela Merkel, reinstalled. Merkel is the most popular leader in modern German history, and one of the most popular leaders in the world. No, the real question in this election regards the margin that will come with that victory. Markets will likely regard the margin of victory as a proxy for the freedom that Merkel will have in continuing her economic policies.

Let’s next look at the major parties and players in the upcoming election. First, there’s Merkel’s CDU/CSU (Christian Democratic Union/Christian Social Union) party. They’re a social-conservative party that leans centre-right. Committed to the euro as a single currency, they’re for fiscal responsibility and firmly opposed to the concept of Eurobonds (i.e., bonds that could be issued jointly by all Eurozone members). Next there’s the FDP (Free Democratic Party), Merkel’s coalition partner in the current government. The FDP is a classical liberal party that supports free-market capitalism and low taxes. Then there’s the SPD, a centre-left party that serves as the traditional base of support for Germany’s urban working class – a powerful constituency. Last, there’s the Green Party, another centre-left party that runs on an environmental and anti-nuclear platform. Greens are typically in favor of better coordination of EU economic policy.

There are a few other parties of significance; they lie mainly around the periphery of influence, but could be a significant disruption to Merkel’s policies if they do make it into the government. Primarily, there’s the AfD party, which was founded in February and wants Germany to drop the euro. AfD is also opposed to bailouts of periphery countries, feeling their costs should be borne by the private sector. There are the Pirates, web activists who draw support from Millennials, but who lack a clearly defined position. Lastly, there’s the Linke party, a descendant of the Communist party. Linke supports the euro, but is moving towards a position of an orderly breakup of the currency union.

When the elections are held, Germans will be voting for members of the Bundestag, Germany’s legislative body. The Bundestag, in turn, elects the Chancellor. To get seats in the Bundestag, a party must get at least 5% of the votes cast. The number of the seats in the Bundestag is then distributed among only those parties that cleared the 5% hurdle.

Currently, the most likely outcomes from the election are either a “grand coalition” of CDU/CSU and SDP or a continuation of the current CDU/CSU-FDP coalition. The latest polls show CDU/CSU as the most popular party, with a share of around 41%. The SPD, Greens, and Linke parties together share about 43%, which suggests that these opposition parties could join to hold a very close competition with the current ruling coalition.

If the election returns a convincing grand coalition between CDU/CSU and SPD, it will likely mean greater policy consistency on European issues. Markets won’t wonder “what’s Germany going to do.” A broad majority would give the new government a certain amount of stability from which to manoeuvre on Eurozone-support programs. Still a positive, a centre-right coalition between CDU/CSU and FDP could come across as a slight disappointment to those hoping for a post-election shift. There would still be policy consistency, but this would require getting FDP across the 5% threshold. Further down the likelihood spectrum is an SPD-Green coalition. Though a relatively low probability, this is the greatest chance for a Merkel-ejection. An SPD-Green coalition would have a modestly more generous German approach to Eurozone support measures, but enthusiasm for this kind of change is likely to wane once the coalition is in power.

So those are the basics. Next time, we’ll look at how Germany will deal with the rest of Europe after the elections…regardless of who wins.

 

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