Short and Sharp: In an uncertain world, German voters value continuity and stability

The German economy seems to be going from strength to strength. Unemployment has fallen to just 3.8%, consumer confidence is encouragingly positive, and the Ifo business confidence index is close to record highs. Perhaps it is no wonder that Angela Merkel is likely to win a fourth term as German chancellor in the federal elections next week.

According to recent polls, Merkel and her Christian Democratic Union (CDU) party are enjoying an almost 15% lead over her closest contender, Social Democratic Party (SPD) leader Martin Schulz. In a system of proportional representation, with several political parties, that lead is vast.

Merkel’s CDU party will still need to seek one or two coalition partners, because the CDU looks set to be short of a majority. Opinion polls point to two possible coalition governments:

  • a repeat of the current grand coalition with SPD,
  • or a “Jamaica Coalition,” a mix of the conservative CDU (typically symbolically represented with the color black), the Free Democratic Party (symbolized with the color yellow), and the Green Party. Black, yellow, and green are the colors of Jamaica’s flag; hence, the name of the coalition.

Merkel has ruled out a coalition with the far-left Die Linke party, and with the far-right Alternative fur Deutschland (AfD). So after the stress of the French election earlier this year, the German election poses virtually no risk of a populist party in government. This is one political event that investors should not be anxious about.

Continuity is the key word. With the CDU set to remain in power, there is unlikely to be a big shift in economic policy. The core aim of the CDU’s manifesto is to reach full employment, and fiscalprudence will remain a priority for the government.

Recently, Merkel endorsed the progression of the European Stability Mechanism (ESM) into a European Monetary Fund (EMF), and she has also grown more supportive of French proposals to create a common euro-area finance minister. But don’t get too excited. An EMF would simply be a slightly enhanced rescue fund, and a finance minister would just be there to better coordinate budget and economic policies. It would be a move in the right direction, but not a giant leap.

From a global perspective, the key focus is on whether Merkel can reduce Germany’s massive current-account surplus. It was 8% of GDP in 2016, the largest in the world in dollar terms, and has been blamed for much of the economic distress in the Eurozone over the past decade. This imbalance is widely considered the result of Germany’s fixation with fiscal prudence. Public pay restraint has meant less domestic spending, fewer imports, and indirect export subsidisation.

The CDU has pledged to cut taxes, but this may not boost consumer spending and imports. Germany’s high savings rate is partially the result of its ageing society. People are saving for retirement, so even if the government cuts taxes, there’s no guarantee that households would spend more. What’s more, Germany’s balanced-budget rule means that tax cuts would likely be offset by reduced spending. More public investment could help reduce the surplus. In its manifesto, however, the CDU only pledges to at least maintain investment at the current level, suggesting that a big increase is unlikely.

So it seems that the German election really is a case of continuity. I would not expect there to be a meaningful impact on German or European equities, or the euro. A little bit boring? Yes. But in an uncertain and sometimes angst-filled world, maybe investors should embrace boring.

 

 

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