Flash update – German Election
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Germany, Europe’s largest economy, went to the polls on Sunday and gave Friedrich Merz, the leader of the conservative CDU/CSU bloc, the mandate to succeed Chancellor Olaf Scholz of the centre-left SPD party.
What happened?
- Germany held a snap election following the collapse of Chancellor Olaf Scholz’s coalition government last November due to disagreements on economic policies and budget planning.
- The CDU/CSU (centre-right party) came first with 28.5% of the vote, however this was below its aim to secure at least 30% of the vote, leaving it needing at least one coalition partner to secure a working parliamentary majority. In line with opinion polls, Germany’s far-right party AfD came in second with 20.8% of votes, doubling its share of the vote. The centre-left party, SPD, came in third with 16.4% of the vote, which is its worst defeat since 1887.
- The result gives Merz the option of forming a two-party government with the SPD. This is the only viable option as he has ruled out governing with either the AfD or the Left. However, this will still be short of a ‘super majority’, limiting Merz’s leverage in negotiating tax cuts and supply side reforms. And importantly, the AfD and the Left have secured enough seats, collectively, to form a ‘blocking minority’.
What are potential impacts/headwinds?
- Merz has confirmed that he wants to secure a high-level coalition agreement as quickly as possible but the SPD will need time to regroup as it’s incumbent leader, Olaf Scholz, has stated that he will not attend negotiation talks. Hence, the new government is unlikely to be in place before April.
- Given the likely coalition will not have a ‘super majority’, any amendments to the country’s debt brake would need support from either the AfD or the Left. However, both parties have already stated that they will oppose this if it’s to fund more defence spending.
- Merz is open to reforming (loosening) the debt brake to finance infrastructure investments and increase defence budgets, especially given recent concerns about the stability of US security guarantees to Europe.
What’s our view and how are we positioned in Multi-Asset ESG Active?
- European and German assets gained traction as the likelihood of simple coalition has emerged with defence stocks outperforming other sectors in anticipation of increased levels of defence spending.
- Going forward, we will be monitoring the implementation of the coalition. The prospect of a two-party coalition led by a strong CDU/CSU will likely be seen as positive by Germany’s corporate sector, promising less policy gridlock and uncertainty than under the outgoing government.
- From a tactical positioning perspective, we added a relative underweight European equity versus US equity position to our portfolios on Monday (24th). This was added as we believe a ceasefire in Ukraine has been priced in very quickly, as well as broader underperformance in Euro Area economic growth relative to the US. We are overweight German government bonds versus French government bonds, as we expect France’s borrowing costs relative to Germany to rise over time.
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