Germany is by far the most important country within the Eurozone, accounting for well over a quarter of the area’s GDP, the largest exporter and the only major country with a budget surplus. Consequently, a political crisis in Germany is sure to have an effect on the area as a whole, influencing not just the DAX, but also the Euro.
Additionally, the President of the ECB’s tenure is up soon, and is currently held by Italian Mario Draghi, with a German representative seen as a likely candidate to replace him – that is, assuming the current administration in Berlin stays in place. But will it?
How did we get here?
Angela Merkel has been the Chancellor of Germany since 2005 and is widely seen as the de facto leader of the European Union. However, things haven’t been going so well for her in domestic politics of late. Following poor performance in opinion polls, the “grand coalition” she led was severely punished in the 2017 federal elections, and it was months before the politicos could agree to form a new government.
Merkel’s coalition partners before the election – the SPD – had promised to not return to government, but ultimately reneged on that promise following protracted negotiations, and the rise of non-traditional parties, most concerning the AfD, seen either as right-wing or outright far-right depending on who you ask.
The Bavarian election
On October 14 the Bavarians went to the polls to elect their regional government, and it was watched keenly by analysts, being seen as somewhat of a proxy for the electoral situation of the country. Merkel’s CSU (the sister party of the national CDU that operates in Bavaria) had done poorly in the federal elections and had responded by taking a series of measures to counter the electoral threat from AfD, mostly in matters of immigration, even getting concessions from the Federal government in that regard.
However, the results showed that the CSU, far from improving its position, had relatively lost support. In the federal election, the CSU managed it’s worst performance to date with 38.8%, but in last weekend’s election, that dropped to 37.2% breaking their record low once again (and far from the 47.7% support they enjoyed in 2013). Their federal coalition partners, the SPD, also suffered similarly disastrous results, with other parties making significant gains – such as the AfD and Greens.
In a conference following the electoral results in Bavaria, Merkel acknowledged that “trust has been lost,” but there were no government changes as a result of the election. However, this has not stopped calls for massive resignations, even from within her own party.
The next regional election is scheduled in Hesse for October 28th, and once again the CDU and SPD are trailing behind in the polls with both the Greens and AfD seen making significant gains. Many analysts are pointing to the shaky grand coalition and the rising discontent over electoral results as increasing pressure on Merkel to step aside, with an unusually poor showing in Hesse as a further catalyst for this movement.
Merkel is the longest-serving head of government in the EU, with some pointing out that new blood is needed to reinvigorate the establishment parties in the polls. Reportedly, given her choice, her replacement would be Annegret Kramp-Karrenbauer; a relatively unknown figure – obscurity which might not serve the CDU in good stead to try and attract new voters. Other contenders have a different problem: those who have gained notoriety have been largely supportive of Merkel’s stances – and her largest critic, Seehoffer from Bavaria – did quite poorly in the polls.
The Bavarian results showed that Germany’s electoral issue wasn’t just the AfD; the SPD lost significant support in Bavaria and are likely to lose even more in Hesse. The rank-and-file have long chafed at the party’s junior partner role in the Grand Coalition government, and not in opposition, and this likely could be fueling an exodus from the party to the Greens in the west and to AfD in the east. Seeing themselves punished once again in the polls for their persistence in aligning themselves across the political aisle could renew pressure for the SPD to pull out of the coalition and bring the German government down. There is even a small chance the SPD could form a minority government, adding extra carrot to this proposition.
New elections in the current scenario are something neither party wants, since that is likely to lead to even more loss of electoral support – it was the threat of new elections that finally got the current government in place.
Without a clear, popular leader waiting in the wings, Merkel stepping down is likely not to improve the CDU/CSU’s position in the short term; and the current administration might try to tough out the political storm. While that might work in the long run, it’s not likely to give investors confidence, and given the myriad issues in the Euro, the lack of solid leadership from Germany could keep the volatility high and the trust low.