The German election this year was meant to be remarkable only for its dull efficiency.
Germany was the sensible, grown-up power in a room full of populist toddlers, or so the story went. The true liberal heart of Europe, and increasingly the world, with Angela Merkel an unassuming blank.
Well, so much for that theory…
A very messy election indeed
Germany’s election in September was messier than it looked to the outside world. Angela Merkel’s party, the CDU, came first. But it won with a badly reduced majority. It was the CDU’s worst showing since 1949.
None of this should have come as a big surprise. Regardless of what you think about Merkel (I am pretty indifferent, I have to say), managing a fourth term in power is a considerable achievement for any democratic leader. Remaining apparently sane while doing so is nigh-on extraordinary.
And electorates get bored, and they want change (that’s your Hyman Minsky again – stability breeds instability). So shedding support after this long in power is almost inevitable.
However, newspapers also need a narrative, and one of the current narratives is that Britain and America are the new bad guys because of Trump and Brexit. Meanwhile, France under Macron is tantalising but a bit flaky (sorry – I did try to come up with a good croissant joke to go with this, but you’ll have to insert your own here).
So that left Germany as the nominated good guys, upholding centrist values for all. And the story in the run-up to the German election (in the British press at least) was all about the marvels of Merkel and the unity displayed by the German people.
But turns out that Germany’s just like everywhere else – a bit disgruntled, to say the least.
The two big parties – Merkel’s CDU and the Social Democrats – lost huge numbers of votes. The Greens and “The Left” (I think you can guess which way they swing politically) gained a few votes. But the big winners were the nationalist AfD – which became the third-biggest party by campaigning on immigration – with the liberal, pro-business FDP coming in fourth.
Understandably, no one in Germany is keen to let a hard-right party anywhere near the reins of power, and so the CDU has been trying to negotiate a “Jamaica” coalition – named for the colours of the three parties involved. The CDU (black), the FDP (yellow), and the Greens.
Trouble is, that was never really a tenable coalition. It’s not quite as unlikely as the Conservative party in Britain trying to co-operate with the Green party, but the ideological divisions are similar.
And now, the talks have collapsed. The FDP leader Christian Lidner pulled his party out late last night, saying that “it is better not to govern than to govern badly”.
Three unpalatable options for Merkel
So what happens now? Merkel is off to talk to the German president later on to let him know (though if he’s been watching the TV he’ll probably know by now).
But unless Merkel can get the FDP back for another round of talks, then she’s left with three choices, reports the FT.
She could try to go back to her old coalition deal with the Social Democrats; but the Social Democrats, under ex-European Parliament president Martin Schulz, had already ruled that out. She can try to govern with a minority government in coalition with the Greens, which means trying to cobble together makeshift alliances every time something important comes up, which is of course, hardly ideal. Or she can push for a new election. The trouble with that, as the FT points out, is that everyone would worry that AfD would do even better than the 13% they notched up in September. Which would rather leave the country with the same problem it has now, only worse.
Whatever happens, it’ll no doubt be a bit longer before Germany has a settled government. So what does that mean in practice for asset prices?
Mario Draghi , head of the European Central Bank (ECB), will be pleased, at least – this should aid his cause of keeping the euro weak against the rest of the world’s currencies. Politics is usually trumped by monetary policy and interest rates and quantitative easing and all the rest of it.
But will all this havoc at home, is the German contingent on the ECB going to have the same desire to push Draghi towards tightening monetary policy? Maybe. But I reckon that on balance, this is a negative for the euro.
That will be especially so if a new set of German elections start to bump into the Italian electoral cycle – Italy has to have an election by May 2018 and everyone is already getting a bit worried about what that might produce.
A weaker euro, ironically, will typically mean stronger German stocks. I’m not saying you should increase your exposure to Germany – it’s not particularly cheap (probably about middle-of-the-road as far as global markets go right now) – but this certainly isn’t a cue to sell.
Secondly, there’s Brexit. Naturally, all comments sections under stories about German political havoc descend into a battle between ardent Remainers defending Merkel and ardent Brexiteers saying “I told you so” – indeed, it’s like Catalonia all over again. Any sane person is better off avoiding reading this drivel.
It’s best to think of this in human terms. Say you’ve got problems at home and you’ve got an administrative headache at work. In my experience, you just want the admin headache to go away. Under those circumstances, you’ll swap “optimal” for “fast” – a Gordian-knot style solution over elegance.
Is that good or bad for Britain? On balance, it’s probably a minor positive. If Britain is willing to cough up enough of a settlement, then any appetite to play political games, simply pour encourager les autres, is probably thin on the ground.
Beyond that, another German election probably really would rattle the euro quite badly, as it’s hard to see any other result making things more clear-cut. So my gut feeling is that Merkel will probably try to push through with a minority government. I’m no expert on German politics, so perhaps there is another way forward – but it certainly wouldn’t make for a very enjoyable fourth term.