Sep 20, 2021 Politics

Markets are barely reacting to the sharp change in the German Federal election odds. Rightly so?

Martin Moryson

Martin Moryson

Chief Economist Europe
to read

Within just a few months, the CDU's comfortable lead of 21 percentage points over the SPD has completely melted away, and the spring euphoria for the Greens has also vanished - they lost 8 percentage points and now occupy a distant third place. This leads to completely new coalition constellations and a major shift in power between the parties. We have updated our baseline scenario accordingly and considered the implications for the capital markets. To put it in a nutshell. We are sticking to the basic findings of our original analysis. Given the proportional representation system, the strong role of the Bundesrat, the firm embedding in Europe and the broad consensus regarding the most important issues, we assume that concrete policies would not differ very much – almost regardless of which coalition it finally makes. This takes some of the edge off the otherwise unusual starting position. After all, in the federal election (September 26), for the first time in the history of the Federal Republic, the incumbent chancellor will not run for re-election. The question of which government will govern under which chancellor thereafter is completely open. Following the turnaround in the polls, the most likely governing coalition is no longer Black Green (CDU/CSU and Greens), but a traffic light coalition of SPD, Greens and FDP.

What do the polls say?

In recent weeks, the polls have changed dramatically: The SPD has risen to become the strongest force and can expect a significant increase in seats compared to 2017. The CDU/CSU would lose massively compared to 2017 and is currently in second place in the polls. The Greens would also have lost significantly compared to their early summer highs but would emerge strongly compared to the 2017 federal election. The FDP and the AfD would achieve roughly the same result as four years ago, while the Left Party would only be just above the five-percent hurdle.

The polls

Overall, the chances of Olaf Scholz (SPD) becoming the ninth Chancellor of the Federal Republic have increased, while those for Armin Laschet (CDU) have decreased. As things stand, it is highly unlikely that Annalena Baerbock (Greens) will become Chancellor.

Which coalitions are possible?

One of the peculiarities of this election, however, is that it is not possible to draw any reliable conclusions about the coalition partners from the election results.

The high volatility of the polls makes numerous election results and thus a variety of highly diverse coalitions conceivable. If, for example, the Linke (Lefts) fails to clear the five-percent hurdle and the Greens gain a few percentage points more than currently expected, it would suffice for a red-green coalition. That would be the only two-party alliance that is currently realistic; a three-party coalition of SPD, Greens and FDP or Left Party is also possible, as is a three-party alliance of SPD, CDU and CSU. A coalition of four parties, namely CDU, CSU, Greens and FDP, is also conceivable.

Potential coalitions based on current polls

The most likely scenario, however, is that two blocs, namely SPD/Greens on the one side and CDU/CSU/FDP on the other, will face each other after the election. None will have a parliamentary majority and both blocs will then try to lure a party from the "opposing" bloc into their own. Our baseline scenario from today's perspective would be a traffic light of SPD/FDP/Greens, the second most likely would be a Jamaica coalition of CDU, Greens and FDP.

Does this have an impact on the capital markets?

Election evenings are always evenings of surprises, and so the mood could still turn negative in the short term because everyone suddenly realizes how complex and protracted the coalition negotiations could become. Words like "minority government," "new elections" and "ungovernability" could make the rounds and lead to uncertainty.

We believe that even in such a case, the markets would continue to react quite calmly to the news flow, and quite rightly so. For one thing, there is broad consensus on the key points of the potential governing parties: climate protection, investment in education and in digitization are at the top of the agenda for all parties. More extreme demands from one side (wealth tax) or the other (tightening the debt brake) are likely to fall victim to the coalition negotiations, as in all likelihood parties from both "camps" will be involved in a new government. The two most likely coalitions, namely the traffic light and Jamaica, each involve the Greens and the FDP, whose demands are likely to largely neutralize each other. The strong role of the Bundesrat and its current colorful composition make abrupt policy changes unlikely anyway. After all, all important bills must pass through the Bundesrat, and there the CDU, the SPD or the Greens can bring them down because the states can only ever cast their votes as a bloc. If the coalition members of a state government cannot agree on a yes or no vote, they must abstain, which in effect counts as a vote against, since most votes require an absolute majority.

So, as open as the result is, as narrow is the room for maneuver. At least for the capital markets, this is not a bad constellation.

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