Merkel remains at the helm

Following Germany’s general election results, Robert Bergqvist, Chief Economist at SEB, the leading Nordic corporate bank, reflects on the implications for the EU, euro and wider geopolitical stability:  

“Angela Merkel remains, as expected, Germany’s Chancellor in the coming four years that are so critical for the EU, euro, the Brexit process and geopolitical stability. The result means that Merkel must now govern the country from a weaker posi­tion and in a new political landscape as the Christian Democratic Union of Germany (CDU) and the Christian Social Union in Bavaria (CSU) lost support and the number of parties in the Bundes­tag increased from four to six.

How will European Central Bank (ECB) monetary policy be affected?

“The possibility that the ECB will initiate a policy normalisation process increases as political risks in the eurozoneis further diminished, political steps towards an increased euro area integration and fiscal coordination occurs, and a somewhat more expansionary German fiscal policy is expected. We forecast that later in the year the ECB will decide to reduce its monthly bond purchases in 2018.”

How has Brussels reacted?

“With the German and French elections behind us, the future of the EU and the euro will get more attention. This is something France’s President Macron is expected to say in a keynote speech about the EU and euro on 26 September. But what the new Berlin Government looks like is not yet known. There is a risk of a somewhat less EU friendly coalition. Germans are generally positive about the direction their country is taking but are dissatisfied with where the EU is heading. If Macron chooses to drive the process too hard towards EU federalism in the next few months, the resistance in Germany to integration is expected to increase.”  

What does the election imply for the EU/euro?

“Since the next four years are expected to be Merkel’s last as Germany’s Chancellor, she can afford tougher policies both on a domestic and global level. It is time for Merkel to prepare and write her political will. If Germany and France take clear leadership in the coming years, this will have a positive impact for the EU and euro, however we should be prepared for a bumpy ride.”

What is the impact on the euro and bond yields?

“Currently the eurozone is experiencing an economic tailwind. In addition, the ECB is expected to initiate a monetary policy normalisation process in the autumn. Overall, the euro and stock markets are supported by increasing optimism. The downside risks to the eurozone are primarily linked to political events; the deteriorating security policy situation globally, questions about Russia and Turkey’s political future, the instability in the Middle East and the referendum in Catalonia on 1 October.”  

How will the market react to the election result?

“Although Germany is now facing a new political landscape, the election results are broadly in line with the expectation of opinion polls. However, we currently don’t know what the government will look like and we don’tknow the result of negotiations between parties that politically aren’t close on all issues. Still, less uncertainty means support for the euro and rising stock market and bond yields.”

What does the election mean for US-Germany relations?

“German-US relations are frosty and the personal chemistry doesn’t seem to work between Chancellor Merkel and President Trump. The fact that Germany’s economy is strong, and is running a very large current account surplus has put Germany on the US ‘watchlist’ as a possible currency manipulator. This continues to influence German-US relations.”

Will the Brexit process be affected?

“Possibilities to make progress in EU-UK discussions should improve when Berlin can focus more on external issues such as the future of the EU, euro and economic and political relations with other countries. Merkel wants political relations with other countries and a constructive solution to Brexit, but the process is very complex and becomes even more complicated by British domestic policy issues and the risk of a new election.”

Is the election good for Sweden?

“Political stability in Europe and a strong German economy is good for Sweden as Germany is Sweden’s most important export market. Nevertheless, major question marks remain about Sweden’s future relationship with the eurozone and its position within the EU. Sweden will most likely try to build stronger ties to Germany when (if) the UK leaves the EU.”