German Election Update: A new era?
Head of Macro Analysis
Summary: Yesterday's last TV debate between the three lead candidates (Spitzenkandidaten, in German) confirmed the current momentum in the German election campaign.
The centre-left SDP leads Refinitiv’s polling aggregate by four points over the CDU/CSU after rising more than nine points in the last eight weeks. Assuming there are no last-minute surprises, the SPD candidate, Olaf Scholz, is well-positioned to succeed Angela Merkel as German chancellor. Consequently, we expect the domestic fiscal policy to turn more expansionary, targeting both green investment and digitalisation. In terms of European implications, it could open the door to a reform of the rules of the Stability and Growth Pact (SGP). But a reform of the debt brake introduced in 2009 following the Global Financial Crisis is unlikely.
Two government options: The last TV debate confirmed the current trends in the German campaign. According to the latest Forsa opinion poll (see chart below), support for the SDP is at 23.6% - far ahead of the CDU/CSU (19.3%) and the Greens (17.3%). The pro-business FDP (Free Democratic Party), which could play kingmaker in this election, is stable at 12%. This confirms the trend of Refinitiv’s polling aggregate mentioned in the introduction. My non-scientific guess is that the next government will certainly be a coalition of the SPD, the Greens and the FDP – the so-called Traffic Light coalition. Another option could be a Jamaica coalition between the centre-right CDU/CSU, the Greens and the FDP. But CDU Armin Laschet’s low popularity is a major obstacle. Expect tough government-forming negotiations.
No changes to the debt brake: A reform of the debt brake, which limits the Federal Government’s structural net borrowing to 0.35% of gross domestic product, is unlikely. It would require constitutional amendments. In addition, this is one of the two red lines along with no tax hikes drawn by the FDP. The SDP, the CDU/CSU and the Greens are fine with it. They will probably discuss a green investment package which would not be part of the budget. A more gradual re-introduction of the debt brake is a possibility too.
Green is the new black: German politicians acknowledge there is an urgent need for more investments, especially to reach a low-carbon society. The Greens advocate for €500bn in climate change investment over the next ten years (about 1.5% of GDP per year). The SPD has been less explicit. It seems to aim for something around 1% of GDP in green investment. The CDU and the FPD don’t put a number on it. But they also call for sizable green investment. With the risk of a major energy crisis hitting Europe hard this winter (see “For how long equity markets can ignore the energy shock?”, by Peter Garnry, 14 September 2021), we expect the next government will create the right conditions to stimulate the green transition. In our view, funds should be allocated to controllable renewable energy (hydroelectricity and biomass) and not to variable renewable energy (wind power and solar power). The former must be an integral part of the energy mix. The latter is not useful since it is not able to supply a steady supply of electricity. Hopefully, the next government will also backpedal on the decision to exit nuclear power.
Digitalisation and other investments: We believe the next government will create incentives for the private sector to do investments, especially for the digitalisation of the economy. Much more efforts will be needed to modernize and digitize the country’s administration. The pandemic served as a wake-up call for many. People had issues working from home due to patchy internet connections. Schools lacked basic technology for remote learning, for instance. This is due to a persistent lack of public investment over the past ten years. But it is also partially explained by the division of power enshrined in the constitution. Germany's sixteen states shape their own policies on areas including health, culture, and education. The creation of a ministry of digital affairs could improve coordination between the federal government and states.
Welcome changes for the EU integration: A Traffic Light coalition government would have more positive implications for European integration and EU-level fiscal spending than a Jamaica coalition. We could see a pace for the reform of the rules of the SGP to allow for more public investment, in the future. We could also see faster implementation of an EU digital tax and a minimum global tax. It would put less pressure on the European Central Bank to exit emergency monetary policy measures too.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.