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Merkel’s Return Would Affirm German Status Quo  




Our Europe experts believe that with German Chancellor Angela Merkel set for re-election, current policies will continue. And despite Germans’ general reluctance to foot the bill for the euro zone, polls show they’re positive about Europe and the euro.
By Neil Dwane, CIO Equity Europe, Matthias Born, Co-Head of European Growth Equities, and Ralf Walter, Senior Portfolio Manager.

Status Quo

With the German federal elections scheduled for 22 September, current polls indicate that the most likely election result is a return to power for the CDU/CSU¹– FDP², with Angela Merkel returned for a third term as Federal Chancellor.
This would mean continuity of policy with major changes unlikely, while necessary and previously postponed reforms in areas such as energy, pensions or tax policy are not expected to be back on the agenda.
The positive aspect would be that, with gross domestic product (GDP) rising 0.7 per cent in the second quarter and German business confidence at a 16-month high, one would expect to see a continuation of these trends in the second half of the year. However, with reforms put on the back burner, the long-term implications for Germany may be less positive.

Alternative outcomes and implications for capital markets
For an incoming government to be committed to reforms would require an SPD /Green government or a grand coalition of the CDU/SPD; let’s not forget that Germany is still reaping the benefits of the reforms made 10 years ago, under the SPD, that have boosted competitiveness. In the event of either of the two alternative outcomes occurring, here is our analysis:

CDU/SPD grand coalition
Again, a continuation of government policy – at a time when the economy is improving and confidence rising – would be positive. Additionally, this result would be positive in the short term for the euro zone as the SPD is seen as even more pro-euro and pro-debt mutualisation, having even spoken of a euro-bond issue. However, any domestic boost is likely to prove short-term as the SPD is expected to revert to the “Merkel strategy”. Longer-term it should prove positive, with more reforms in Germany (adjustment of labour market reforms, healthcare, pensions, education, etc.) as the two largest parties have the power to push through these reforms. Moreover, with the CDU dominating the Bundestag (lower house) and the SPD dominating the Bundesrat (upper house), a majority in both chambers would enable major reforms to pass more easily. With the SPD and Angela Merkel both wanting to raise the minimum wage, domestic consumption in Germany could enjoy a boost.

A minority government tolerated by Die Linke ; markets could react negatively as they are pushing for tax increases and, as an unknown quantity to markets, could cause some uncertainty and volatility. Longer term, it depends on which reforms are undertaken and how they impact Germany’s competitiveness.

The wider implications for Europe
There has been an expectation over the years that Germany would move away from its commitment to Europe, as Germans have become increasingly reluctant to “foot the bill” for the rest of the euro zone. This reluctance continues to be mirrored in the latest pre-election poll findings in Germany. But despite this, the German attitude towards Europe and the euro has remained very positive, with 66 per cent of Germans in favour of European Monetary Union (EMU) and the euro and 83 per cent favouring a banking union in the form of a central supervision authority.

Moreover, of all German politicians, two of the architects of the European Stability Mechanism (ESM) and various rescue packages are the most popular: Chancellor Merkel has a 67 per cent approval rating; Finance Minister, Wolfgang Schäuble, currently has a 64 per cent approval rating.

A positive outcome for Europe, whatever the result
While there are differences in the parties’ election programmes on joint liability of public debt and the size of stimulus packages for struggling euro-zone countries, with all major parties pro-Europe, it’s unlikely that any important euro-zone initiatives will be blocked in the Bundestag and Bundesrat. In fact, the SPD could potentially be even more supportive of the euro zone by giving some countries additional funds to restore/restructure their economies. Once the elections are out of the way, Germany will again be able to focus on euro-zone reforms. Additionally, with Germany’s relationship with France having suffered since François Hollande took office, there could be a new opportunity to improve relations between the two countries. Certainly, should the grand coalition form a new government, countries such as France would welcome the Social Democrats in government.

Implications for equities
Not surprisingly, domestic companies would be more affected by the specifics of the economic and tax policies of an incoming government than global companies that are diversified both in terms of operations and markets. Once the German election is out of the way, the fact that Germany will be able to refocus attention on the euro zone should help confidence in Europe as Germany’s role as the “anchor” for the euro zone is reconfirmed. Moreover, with growing geopolitical tensions in the Middle East and emerging markets under pressure, investors are again likely to focus on the stability that investment in Europe offers.

¹ Christian Democratic Union/Christian Social Union
² Free Democratic Party

The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.


Allianz Global Investors Distributors LLC, 1633 Broadway, New York NY, 10019-7585,, 1-800-926-4456.


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