The general elections in Germany on September 24th should not materially alter the outlook for the continent as the most probable outcome is keeping on the current course. The various coalition options will see the expected tax cuts have a slightly positive, but limited, macro impact. The good news for the continent is that the European agenda should advance over the next four years.
Angela Merkel is likely to remain German Chancellor for four more years. Current polls reveal that she has consolidated her advance and that her Christian Democrats are likely to remain the strongest political force in Germany. However, as six parties (up from four in 2013) are likely to enter the Bundestag, she will have to form a coalition to secure a majority in Parliament. With two weeks to go, either a continuation of the current “Grand coalition” with the SPD or a new alliance with the liberal FDP and the Greens is the most likely outcome.
In any case, all major parties are proposing a pro-European agenda and income tax relief given the fiscal surplus. The coalition negotiations following the elections are likely to last several weeks and will show a compromise on its implementation. At the end of the day, Candriam expects a next step in the European agenda to include a common defence policy, the creation of a European Monetary Fund, the likely creation of a European Finance Minister and a hard line on the Brexit negotiations.
The short-term market impact should be limited but, longer-term, the outcome should be market-friendly. Unlike the polls in other major countries over the past twelve months, no major party is running a platform on exiting the EU, cutting the healthcare service or building a wall with its next-door (country) neighbour – in a nutshell, political risk should not rise as a result of the elections. In the medium term, this is likely to prove supportive of European assets, including the Euro.
Sources: Bloomberg, Forschungsgruppe Wahlen, Candriam Sources: Bloomberg, Candriam