Summary: Germany is on the brink of a historic political shift. What would a Green election win mean for the markets?
On a federal level the German election campaign is heating up and change is afoot. The Greens have a chance to become the dominant party in national government for the first time in history, four decades after its foundation. If the polls have it right, this would be the first election since WW2 where the combined CDU/CSU and SPD vote would no longer be a majority. It would be a historic shift for Germany and the party itself, formed out of a broad array of student and popular protest movements, and historically seen as economically reckless radicals and fringe idealists.
The party’s recent success highlights a generational shift in politics with environmentalist and socially progressive policies becoming more mainstream. It points to the rise of a new generation intent on mitigating climate change and reducing emissions through a lens of equality and social justice, thus influencing policy in the years to come.
The former “anti-party party” Bündnis 90/Die Grünen (Green Party) has also come of age along with Millennials and Gen Zers who are pulling the centre of gravity of politics to the left. According to Eurobarometer, who have consistently surveyed the population in all EU member countries since 1973, a growing proportion of Millennials and Gen Zers identify themselves as left-leaning.
Evolving from its 1980s roots the party has shifted toward the centre, maturing to become a more united moderate force that has gained markedly in popularity. Now ranking second in national opinion polls, the Greens are set to form part of the country’s new coalition government following September’s election. The ruling coalition that emerges after the federal election is still up in the air, but the Greens are all but certain to play a role. A strong governing share with our baseline call of a black-green government, or potential victory with Annalena Baerbock becoming the first Green chancellor, would represent a marked transformation as the Greens would wield a powerful role in determining the shape of German and EU policy in the years ahead.
The Greens’ success is partly due to elevated concern for combating the climate crisis and protecting the environment, and a backlash against inadequate climate politicking. As the “Fridays for Future” youth climate movement took 1.4m people to the streets, and with the call to arms from social justice movements like Black Lives Matter, the Green party, who capture the zeitgeist of these movements, have gained markedly in popularity. And the party’s longstanding persistence on climate change gives them credibility as their principles reach the majority.
For many voters Merkel has disappointed on climate, creating a window for the Greens. Germany effectively failed to hit its 2020 climate goal to cut emissions by 40% compared to 1990 levels and was saved only by the pandemic which ground the world and carbon emissions to a standstill. According to one poll, 51% of voters in Germany cited “combating climate change and protecting the environment” as their top concern.
In the 2019 European elections the push to revitalise Europe’s climate policy, spurred on by young climate activists, reaped rewards as one in five German voters supported the Green Party. But it was the young, who by and large hold stronger pro-climate attitudes, that showed up in force; amongst under 30s the party received 30% of the vote. For this age cohort this issue is not one for political polarisation.
The above divide was reflected by almost the opposite in voters over 65, pointing to a generational gap that may only grow as young voters bring climate change to the fore. However, as of 2019, the average age of the German population was 44.5 years. In fact, Germany has the highest average age of any European country, with an ever-increasing population share aged over 65. Currently 21.8% of Germans are older than 65, just 10.3% of the population are between 15 and 24, and almost 70% of voters are over 40. In Germany, unlike the US where Millennials are the largest generation, it will be at least another 10 years before Millennials and Gen Zers form the majority of the voting-age population. So, although demographics and growing climate concern has and will continue to play a role in the Greens’ shift in electoral clout, it is not the full story.
In recent decades the party has shifted toward the centre, appealing to both older and younger voters as policies long supported by the Greens have become more mainstream. As voters have shifted to the left, the party has shifted to the centre and the former radicals are now perceived as “a party for everybody”. “Radical realism” is now a popular Green catchphrase. The average age of party members is 48 and 60% are women. Today’s Green voters are typically urban professionals from strong economic districts, and many have grown with the party from their grassroots whilst maintaining their core founding values of sustainability, environmental protection and social justice.
Structural factors can also be attributed to the party’s recent success as in Germany (and many other developed nations) the political centre has been eroded with the far right growing. This has allowed the Greens to draw in disillusioned mainstream voters as a counterforce to right wing nationalism, with the Greens now making inroads in traditionally conservative regions of Germany.
Why should markets care? The Greens’ growing electoral clout provides an opportunity for the party to pioneer a number of structural changes as well as a decarbonising, environmentally progressive agenda for Germany, the EU’s largest economy, and Europe as a whole—a revolution of sorts!
The party’s policies remain true to their founding principles, with a manifesto that puts equality, social justice and humanitarian issues at the heart of sustainable and environmentalist policy. Core policy includes pledges to achieve a 70% reduction in greenhouse gases from their 1990 level by 2030—a significant step up from the current 55% reduction target and one that would put Germany ahead of the EU’s Green Deal objectives. The pledges will be achieved through phasing out coal power by 2030, accelerating Germany’s renewable energy transition, investment spending on green infrastructure and only allowing zero-emission cars from 2030 onward. This will foster a rate of growth of renewable power capacity and decarbonisation in concert with what is needed to limit global warming above pre-industrial levels to 1.5°C.
When it comes to tech leadership Germany has been falling behind in recent years. Patent studies show that over the last decade Germany’s prowess in next generation technologies is slipping. In the year 2000 Germany ranked in the top 3 countries across 47 technologies; fast forward to 2019 and the study shows Germany ranks in the top 3 for just 22 technologies.
Priming the German economic model for the decades ahead requires a proactive effort to succeed in the Greentech race, capturing the opportunity to solidify Europe as a leader on climate. Here the Green party is clearly a strong contender in forging and future-proofing a new Germany.
The Greens are also unequivocally globalist and pro-EU, aiming to expand the bloc’s influence as a “global player”, favouring deeper EU integration and a strong state with increased spending challenging German orthodoxy. They are in favour of revising Germany's constitutional "debt brake", which limits structural federal deficits to 0.35% of GDP, and stepping up investment to the tune of €50bn per year. “The smart entrepreneur doesn’t save, they invest. The smart state does the same” cites the party platform.
A Green victory or strong governing share along with Germany’s influential status within the EU brings capacity to mould both German and European policy agendas in the years ahead, alongside deepening European integration and reinforcing the role of the EU parliament. The Greens support centralised EU power and the federalisation of Europe—a shift that should accelerate the recent post-pandemic policy pivot towards fiscal dominance and, in the case of Europe, joint fiscal policy. Over time this has the potential to catalyse a future fiscal union sprouting from the seeds of the EU’s pandemic recovery fund, underscoring the push to prioritise broader social goals and income and wealth distribution with fiscal policy, alongside the green transition. This is a far cry from the austerity of recent years that was instrumental in perpetuating slower, lower growth, and potentially marks a new era for Europe.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.