Summary

Helen started by saying one cannot understate the importance of this election. She Does not believe it’s business as usual for Germany and expects more spending, more fiscal stimulus, especially on the environment. New era, new politics. The two traditional parties are in decline and the Greens are a now force. She expects any collation with the Greens to look for ways to circumvent the debt brake. Spending taps are on, going for growth – revolutionary for Germany and Europe leading to a lower Euro, steeper German yield curve and higher German yields across the board – a bear steepening. And potentially a narrowing of spreads with the periphery.

Christopher noted that if the polls are accurate, and that’s not certain given the two recent regional elections, then the two likely outcomes are SPD/Greens/Liberals or CDU/Greens/Liberals. Either would result on not much change to the status quo. An outlier result would be SPD and Greens in a 2 party coalition which would be taken, at least in the short term, as market positive as they would increase spending moderately, be more positive on fiscal spending in Europe but would otherwise represent continuity and stability on the international level. Any coalition will struggle to return to the debt brake before 2024. Believes we will see only a moderate increase in fiscal spending and a small impulse for Europe. Lachet would continue with Merkel’s consensus building ways in Europe. Scholz is more likely to drive the agenda forward. He is still fiscally conservative however. Expect a moderate move away from Merkel’s position on China and Russia to a firmer line as the Greens will be part of any coalition.

Joseph thinks this the most exciting and open election seen in Germany for quite some time. In line with the others, he expects either a “traffic light” coalition or “Jamaica” coalition, and no big changes to policy (Helen the outlier). We are not at the beginning of some radical change from one government to another. One can discount the SPD and Greens as they don’t have the numbers and the red/red/green looks unlikely as no one wants it. A three party coalition means a lot of energy on staying together and internal focus rather than on Europe. Greens will sacrifice fiscal policy for climate spending. The “Traffic light” coalition will result in significant raises to the minimum wage (Scholz) so higher labour costs in the lower sector. Joseph questioned Merkel’s economic reform or rather lack of it and whether she left Germany well positioned for the future with some unsustainable strategies. Wolfgang gave more credence to the possibility of red/red/green coalition, whilst agreeing that no party really wants it, he can see that if the polls are accurate there would be too many divergent polices between the three top polling parties, making forming a government difficult. Red/red/ green is the fiscally least constrained option. Though this is not his main scenario as he suspects the centrists will come together and form government. Wolfgang says it doesn’t really matter who the chancellor is. He will be watching Sunday to see if the if SPD have more coalition options, then they can go into negotiations with a stronger hand and make demands. He does not think history will judge Merkel favourably. Merkel did not do enough in the financial crisis. She did not want to invest capital. She switched off nuclear power resulting in a reliance on Russian energy, a major factor in disharmony in the EU and she failed to properly digitalise Germany. It is foreseeable the German car industry will not be the leading car makers in the future. Thinks the ECB is still in an asymmetric world where they are fighting deflation and they are more behind the curve than the Fed or The BOE.

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