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Annalena Baerbock (Greens) and Armin Laschet (CDU, center) are struggling on the campaign trail, while Olaf Scholz (SPD) is currently leading in the polls. (Keystone)
Eurozone German election race remains wide open
02 September 2021, 6:30 pm CEST, written by UBS Editorial Team
German voters will on head to the polling booths on Sunday, 26 September, to elect their next government and install a new chancellor, ending Angela Merkel’s 16 years in office. It is going to be the most volatile and unpredictable federal election in recent memory. The UBS Chief Investment Office (CIO) shares what they believe investors should be aware of.
Over the last few weeks, the popularity of the chancellor candidates for the three main parties—Armin Laschet (CDU/ CSU), Annalena Baerbock (Greens), and Olaf Scholz (SPD)—has been an influential factor. Laschet has struggled on the campaign trail, not convincing German voters that he should be their next chancellor. Baerbock, the most inexperienced of the key candidates, has also struggled as voters question her credentials. It is Scholz who has surprised to the upside. As the current finance minister, he is well known in the eyes of voters, is credited with a strong fiscal response to shelter the economy during the pandemic, and is proving popular on the campaign trail. His reward has been a surge in support for the SPD, which is now leading in some polls for the first time since 2017. But predicting who will come out on top on polling day is impossible at this stage. With no single party holding a convincing lead, the only apparent certainty at this stage is that for the first time since the early post-war years, the next German government will be a three-party coalition. So this is what investors need to know about the potential election outcomes: A CDU-led coalition with the Greens and the Liberal Party is still the most likely outcome: In CIO's view, a “Jamaica” coalition (CDU/CSU, Green, FDP) is the most likely outcome from the election, as they believe that there are more common areas for agreement and compromise across the policy proposals. As things stand, this coalition would imply that Laschet will be Germany’s next chancellor, but given the fall in support for his party, and his unpopularity with voters, this is far from certain. The likelihood of a center-left government has increased, but it would face significant hurdles: The next most likely coalition is the “traffic light” (SPD, Green, FDP), especially if the SPD emerge as the leading party in the election. Such For UBS marketing purposes
a coalition would likely see Scholz become the next chancellor, with key ministries shared between the coalition partners. In CIO's view, this is not the most likely outcome, even if SPD were to win the popular vote, because CIO believe that the FDP would prefer to form a government with the center-right CDU/CSU. The SPD and the Greens have governed together before. However, given diametrically opposed views on, for example tax and fiscal policy, talks with the FDP would likely be very difficult. Nevertheless, it is still a real possibility.
A center-left/left government or another Grand Coalition look unlikely at this stage: The next most likely coalition —and again, it will depend on the final vote tally—is a center-left/left coalition known as Red-Red-Green (SPD, Green, die Linke). Although possible, at this stage CIO do not think this outcome would be easily negotiated. Of the possible coalitions, CIO think this outcome would afford the largest surprise to investors as few have this as their base-case. Other possible coalitions would involve the CDU/CSU and SPD working together but given their recent experience, this is an unlikely outcome. However, many said this after the last election following the SPD’s worst result in a generation, so nothing can be ruled out for now.
So when looking at the main parties’ manifestos, one common area of agreement is the need to tackle climate change. To be sure, the parties’ level of commitment varies and given that agreeing on a three-way coalition will require compromises, many of the most extreme positions will likely be watered down. However, what does seem certain is that whatever coalition emerges from the election, carbon prices will rise, and green investment will soar in the next parliament. CIO also expect the new government to remain constructive towards the EU and adopt a slightly easier fiscal stance which will, in CIO's view, continue to be supportive for peripheral countries in Europe and their bond yields. However, we shouldn’t forget that the main driver here will continue to be the ECB’s monetary support, which together with governments’ fiscal support should help the Eurozone’s ongoing reopening and recovery.
For more, read the CIO report Germany heads to the polls 27 August 2021.
Main contributor: UBS Editorial
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