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MitonOptimal Weekly CommentIn the EU President José Manuel Barroso’s annual state of the union address this week in Strasbourg, he warned that political instability was now the biggest threat to Europe’s fitful recovery from the three-year-old Eurozone crisis. He stated that governments are still at risk of punishment from the financial markets if they veer from the economic reforms recommended by Brussels. Whilst they were not mentioned directly, he was, of course, referring to the countries on the periphery of the EU. However, the fact that the German elections are about to take place on September 22nd, 2013 raises the question: should we be worried about what’s happening in that country?

The importance of Germany in the EU is clear, as the largest economy and trading nation it is the only EU country with deep enough pockets to support any further bailouts (which many believe will almost certainly be the case).

Whilst its current leader, Angela Merkel, has been a staunch proponent and supporter of austerity-based bailout packages for Greece, a change in leadership could have significant implications for the levels of volatility in bond and equity markets, as well as for the entire Euro project as a whole. What happens on September 22nd could thus be very important for us all.

Most recent polls put Chancellor Merkel’s popularity up at around 60%, so it’s likely that she will be re-elected. However, there are some wrinkles in this story. In a situation analogous to the American Congress and Senate, the ability to exercise power depends on whether the governing party (or coalition) has majorities in both the upper (Bundesrat) and lower (Bundestag) houses. This election is for the lower (Bundestag) house, which Angela Merkel’s party – the Christian Democrats (CDU) – is expected to win, although it is not expected to win a majority. To resolve this, it will most likely form a coalition government with the Liberal Free Democrats (FDP) and the smaller left-leaning parties (the Social Democrats (SDP), the Greens and the Left party). There is an outside chance that a new party – the Alternative für Deutschland (AFD) – might also join them, as long as they meet the 5% minimum vote required for parliamentary representation.

The problem is that the CDU and the FDP do not have a majority in the upper (Bundesrat) house and those elections are not going to happen for another three years. A coalition of the two largest parties – the CDU and the SDP – would have a majority in both houses of parliament, but the key risk to the CDU of partnering with the SDP is that, as things currently stand, there would always be the temptation for the SDP to leave the coalition and join with one of the smaller left parties, in order to force the CDU out of office. If the AFD force their way into a coalition government, that would fragment the left sufficiently and leave no incentive for the SDP to leave the CDU coalition.

While this uncertainty will only be resolved after the election, the nature of the debate between the candidates is rather revealing. According to the Financial Times this week, the most pressing issue is whether public canteens should be required to have at least one meat-free day a week. It would seem that the current potential for state-sponsored vegetarianism is creating huge waves amongst the German electorate. The fact that Finance Minister Wolfgang Schäuble said that “Greece would require a third bailout” was not even covered widely in the German press (it was only reported in the international press at first). When asked what Germany means to her, Angela Merkel said “I think of well-sealed windows. No other country can make such well-sealed and nice windows.” While the details of the German electoral system offer great potential for gridlock and the fact that vegetarianism and the sealing capabilities of windows are dominating the electoral debate suggests it’s going to be business as usual from September onwards – at least on the EU policy menu anyway. In other words, we are more likely to be surprised by other sources of volatility this month.

German Elections



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