#Market Strategy — 25.09.2017

German Elections: Key Takeaways

Guy Ertz

Chancellor Merkel’s party won but difficult coalition building ahead.

The election outcome

Chancellor Merkel’s Christian Democratic Union (CDU)/Christian Social Union in Bavaria (CSU) remains the largest political party. Angela Merkel will thus very likely remain chancellor for the fourth consecutive term. Compared to the polls the main surprises were the heavy losses in popularity of the CDU/CSU and the SPD and the sharp rise of the the right-wing Alternative for Germany (AfD) (see chart below).

No government majority will thus be possible without the CDU/CSU. The main parties have ruled out forming a coalition with either the Left or the AfD, so they will likely be in the opposition. The coalition would either be a repeat of the current “grand coalition” between the CDU/CSU and the SPD or a ‘Jamaica coalition’ (based on the “color” of those parties) of the CDU/CSU, FDP and Greens. The SPD leader has already signalled that they are not interested in repeating a grand coalition with the CDU/CSU. We think that the coalition building is very likely to take longer than usual, as the CDU/CSU attempts to form a “Jamaica” government. Such a coalition would also make negotiaions at the eurozone level more complicated.

Before the elections

Opinion polls suggested another lead for Chancellor Angela Merkel’s CDU/CSU. Polls however also suggested a change in the composition of Germany’s Bundestag.

The existant coalition  was between the CDU/CSU and the Social Democratic Party (SPD). The opposition was formed of the Greens and the Left, but polls point to two more parties winning Bundestag seats this time: the liberal Free Democratic Party (FDP), which failed to pass the 5% vote threshold in 2013 and lost its parliamentary presence, and the right-wing populist Alternative for Germany (AfD), which fell just short of 5% on its first attempt in 2013.. Note also that the share of undecided voters was almost 50% which was above normal this close to election day.

A complicated coalition building and lasting uncertainty

It is very likely that the coalition negotiations and personnel decisions will take more time compared to previous elections. In 2013, the CDU/CSU–SPD agreement took two months to conclude; the previous one in 2005 slightly less. In 2009, the CDU/CSU–FDP coalition took only three weeks to find a deal; but they had been in government together on many occasions before. Given the diverging views on several key policy issues and likely internal party politics, we think a coalition building will take longer than usual, as the CDU/CSU tries to form a “Jamaica” government.

Market reactions

German bond yields were broadly unchanged while some peripheral spreads were marginally higher. The Euro was not affected while Asian equity markets are generally lower this morning.