Home Stock Market Germany's federal election could be the race to the Georgia Senate in...

Germany’s federal election could be the race to the Georgia Senate in the fall


When the US Senate suddenly fell into the hands of Democrats after the Georgia run, the impact on the financial markets was huge.

The move is most clearly seen in the bond market – the 10-year Treasury yield
BX: TMUBMUSD10Y

soared to 1.75% from 0.92%. That’s because a razor-thin majority in the Senate allows Democrats to pass a $ 1.9 trillion coronavirus bailout without any Republican support and is making Trillions of dollars worth of infrastructure packages could be passed. Conference.

In Europe, an election with similar stakes is taking place in the race to succeed Chancellor Angela Merkel. Winners can unlock spending in Europe’s notoriously tightening economy.

After choosing Armin Laschet as party leader, election polls show that Merkel’s party, the Christian Democratic Union, will still dominate the eurozone’s largest economy. According to Politico’s polling tool, the CDU alliance with the Christian Social Union gained 28% support. The real change, however, is the Green Party’s success so far, with 21% backing, according to polling firm Politico. That would make the party led by Annalena Baerbock more likely to join the coalition and replace the center-left Social Democratic Party.

North Rhine-Westphalia State Prime Minister and head of Germany’s conservative Christian Democratic Union party Armin Laschet hold a press conference on April 20, 2021

tobias black / Agence France-Presse / Getty Image

Market Prediction It sets a 58% chance for Laschet to become prime minister on December 31st, followed by Baerbock with 28%, and somewhat coincidentally, Merkel with 9%.

Christian Schulz, an analyst at Citi, said the so-called black and blue coalition was the only possible outcome of the September 26 election.

The Green Party is likely to spur more government spending to support environmental initiatives. According to Dario Perkins, executive director of global macro at TS Lombard, a London-based research service, they have the ability to exclude public investment from Germany’s no-deficit rule.

Citi’s Schulz agrees. He says he expects a black-green coalition to have “ambitious” climate protection policies backed by massive public investment, but paid for by borrowing instead of tax increases. It will take a 2/3 majority to cross the constitutional debt threshold, which Schulz says is possible because SPD and the Leftist Party, in opposition, can agree.

This is a development that the financial markets are beginning to value, although it is difficult to discern an improvement in Europe’s COVID-19 vaccination efforts after a slow start.

The yield on the German 10-year package
BX: TMBMKDE-10Y

rose after Baerbock’s choice and the euro
EURUSD,
-0.08%

has recovered from a low in late March at around $ 1.17.

It is unthinkable that the more charismatic Baerbock could become prime minister rather than just a partner in a coalition government. Analysts at BCA Research said: “A leftist surprise in September is finally an upside risk for German and Eurozone assets.” “A proactive fiscal shift will be positive for growth prospects and support cyclical sectors of Germany and Europe such as industry and materials, as well as currency. Europe’s lower parting risk premium also supports the euro and will lead to narrowing the marginal bond yield gap ”.

Both Baerbock and SPD leader Olaf Scholz are pragmatic – but not if they run together, rather than with the CDU / CSU alliance, says Holger Schmieding, chief economist at Berenberg Bank.

Berlin’s rent limit – overturned by a German constitutional court, he said – would be the kind of policy the government would pursue, he said. “A ‘green-red-red’ alliance between the Green Party, SPD and the Left Party without any regulatory element from the CDU / CSU or FDP could herald a major shift in policies of Germany, especially for labor, housing and product stricter than market regulations could dampen Germany’s growth trend, ”he said.

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