How will the 2017 German election impact the Euro?
On Sunday 24th September, the German public goes to the polls in the 2017 German Federal Election. They’ll be electing their political representatives in the 19th Bundestag. The leader of the winning party will be expected to form a government and become Chancellor.
The result of the election is likely to have significant implications for currency markets. Earlier this summer, we saw a surprise hung parliament in the UK general election. It’s political uncertainty led to a days of volatility for Sterling.
We decided to do a little digging into the main contenders in this year’s German election, the potential outcomes and what this might mean for the currency markets and the Euro in particular.
Who are the main parties standing?
The Christian Democratic Union, along with their sister party the Christian Social Union (who operate only in Bavaria), are led by Angela Merkel. They are currently the largest party and head up the existing coalition government. They are a centre-right party that traditionally appeals to older, conservative voters. Their core vote has however been tested by Merkel’s open-door response to the migrant crisis in 2015.
Social Democratic Party
The SPD, led by Martin Schulz, is the second largest party in the current parliament. They are a centre-left party who saw a big jump in the opinion polls when Schulz was elected leader in March 2017, having previously served five years as President of the European Parliament.
The Left are currently the third largest party. Founded in 2007 with the merger of two left-wing parties, they are traditionally strong in the old East Germany. With a number of policies reflecting the position of UK Labour leader, Jeremy Corbyn, they’ll be taking inspiration from his late surge in the vote during the UK election.
The Greens are Germany’s second largest centre-left party and currently the fourth biggest overall. They have previously been in power as a junior coalition partner, most recently with Gerhard Schröder’s Social Democratic Party in the early 2000s.
Free Democratic Party
For the first time in their history, the FDP failed to win any Bundestag seats in the 2013 election as a result of falling short of the required 5% vote threshold. Having been energised by new leader Christian Lindner, the pro-business party will be hoping for a stronger showing this time around.
Alternative for Germany
The AfD are a far-right party founded in 2013. Their anti-immigration, Eurosceptic agenda saw them gain popularity during the migrant crisis. Their appeal seems to have waned as right-wing parties in Europe have lost momentum in recent months.
What do the opinion polls say?
Other than a brief period in February and March of this year, Angela Merkel’s CDU/CSU party have enjoyed a clear lead in the opinion polls ever since the last election in 2013. With just weeks until polling day, the latest projections from YouGov give CDU/CSU (36%) an 11 point lead over the SPD (25%).
With The Left and the AfD closely matched on 10%, and the Greens and the FDP on 7%, six parties are expected to enter parliament by exceeding the 5% vote threshold.
What will the next German government look like?
Given the latest opinion polls, no party is likely to achieve a majority meaning a coalition arrangement will be required. So far, all the main parties have ruled out a coalition with the right-wing AfD, while it is also unlikely that any party will go into government with The Left.
Ideologically, a coalition between centre-right parties CDU/CSU and the FDP would make sense, however this appears unlikely to make up a majority. In order to form a stable government CDU/CSU appear to have two options for coalition partners.
Firstly, they could continue the existing grand coalition arrangement with the second largest party, the SPD. Alternatively, they could form a coalition government with the FDP and the Greens.
Traditionally, the leader of the largest party in the coalition becomes the Chancellor, and so it is expected that Angela Merkel will go on to serve a fourth term as Germany’s leader.
How will the German election impact the Euro?
Currency markets tend to react badly to political uncertainty. A shock defeat for Angela Merkel’s CDU/CSU party would certainly send shockwaves round the world. However, they are expected to comfortably win the most seats, so their choice of coalition partners are likely to have the biggest impact on how markets react.
With new leader Martin Schulz favouring greater European integration, a continuation of the existing SPD coalition may lead to a strengthening of the EU and European institutions. He believes all members should enjoy a more equal footing and is supportive of Emmanuel Macron’s EU reform initiatives. A coalition deal with the SPD should strengthen the EU overall, and could be seen as a positive for the stability of the Euro.
A partnership with the Greens and the pro-business FDP may require concessions on Merkel’s behalf. Should the FDP outperform current polls and score over 10% of the vote, they would be in a position to demand greater influence in a coalition, such as seeking the finance ministry. Their leader, Christian Lindner, has as recently as February this year called for Greece to exit the euro zone. While pro-European, this coalition would be unlikely to be in favour of the further European integration proposed by Macron, leading to uncertainty around the bloc’s longer term prospects.
But as we discussed there can be advantages to embracing market volatility.
What are the implications for Brexit?
As former President of the European Parliament, Martin Schulz has been heavily critical of Brexit, even calling on the UK to re-run the referendum. However, all parties (bar the far-right AfD who believe Germany should follow the UK out of the EU) are aligned that the UK will not be able to enjoy the benefits of EU membership once it leaves the bloc in 2019.
Therefore, regardless of the election result and eventual composition of Germany’s next government, the UK is unlikely to see any change to the EU’s position during the Brexit negotiations.
Whoever wins the German election and however the EUR reacts, CurrencyFair will continue to offer great exchange rates on international transfers.
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