Angela Merkel once again came out victorious in Germany’s election over the weekend, but her win impacts more than just her country. Merkel’s victory and who her party chooses to align with could have a big effect throughout Europe.
European Stock Market Impact
On Monday following the election, global stocks and the European stock market exchange fell and the euro dropped due to concerns over the stability of Germany’s government and economy. According to analysts, the initial reaction from the market to the election was negative. Although Merkel won, it wasn’t a particularly dominating victory for her fourth term, which weighed on the euro as it dropped more than .8% against the dollar, compared to Friday at $1.1846.
Merkel’s win brings continuity to Germany and makes her the longest-serving current leader in Europe, but the hard-right opposition party won parliament seats for the first time, which could lead to potential in-fighting within the country. The threat of discord has caused many investors to lower their outlook and proceed with caution.
Even in the weeks leading up to the election, German business confidence plummeted unexpectedly, which led many experts to suggest that the current upswing in the country’s economy could lose momentum soon. The biggest concerns were in the manufacturing and wholesaling industries. However, survey results used to measure business confidence haven’t yet taken into account the actual election results, meaning things could still change slightly. Ifo’s chief economist Klaus Wohlrabe said the results could bring more business uncertainty, especially due to the difficulty in achieving the “Jamaica” coalition between Merkel’s conservatives and pro-business Free Democrats and the Greens, which some experts are saying is the most likely coalition to form.
Waves Across Europe
Germany’s election is the last in a series of pivotal elections held across Europe in the last year. As Europe’s largest economy, anything Germany does is felt throughout the EU. Although uncertainty abounds, many analysts are predicting that 2017 will still be a good year for the German economy, even if the third quarter is weaker than the first two, as most people believe it will be. With increased spending by the government and individuals, Germany’s economy grew 0.7% in the first quarter of 2017 and 0.6% in the second quarter.
As Merkel works towards creating a new coalition, the Jamaica coalition seems commonly mentioned, though it could be hard to achieve. In order for the coalition to work, Merkel would likely have to appease some financial control to the FDP. Such a coalition would likely lead to tax cuts for businesses and limitations to European integration, as the FDP wants each Eurozone country to take greater individual responsibility.
“A coalition consisting of CDU/CSU and FDP would offer chances to embark on a more business and growth-friendly course, including a sizeable net tax relief. This coalition would be more reluctant to go ahead on the road to a deeper European integration,” read a recent report by Commerzbank, which also noted that the party would need 10% of the votes to make these demands.
Another possible coalition would be CDU/CSU with the Social Democratic Party, which is similar to the current configuration. However, the SDP recently appointed far-leftist Martin Should as its new leader, and he is likely to demand greater authority in government, increased European integration, and expanded welfare and infrastructure spending in Germany. With Shulz in power it is likely that Germany would give up its title as defacto head of the EU. Without Germany pulling the strings, other EU countries could possibly step up for a more even spread of power.
Merkel said she hopes to have a new government in place by Christmas, meaning there is plenty of time for new coalitions to form. Those groupings will ultimately decide the impact that Merkel’s victory and the German government has on Europe and the EU economy.