Germany’s federal election may be the Georgia Senate race of the autumn

When the US Senate surprisingly fell into Democratic hands after the Georgia runoff, the impact on the financial market was enormous.

The move was most obviously seen in the bond market – the 10-year US Treasury Department’s return
BX: TMUBMUSD10Y

shot from 0.92% to 1.75%. That’s because the razor-thin Senate majority has allowed Democrats to push through a $ 1.9 trillion coronavirus bailout package without Republican support, and it is possible, if not definitive, that an infrastructure package could be implemented in Billions of dollars through Congress.

Similar elections are brewing in Europe in the race to succeed Angela Merkel as Chancellor. The winner could unlock spending in Europe’s notoriously strained economy.

According to surveys by Armin Laschet as party leader, Merkel’s party, the Christian Democratic Union, will continue to rule the largest economy in the euro zone. According to Politico’s survey tracker, the CDU alliance with the Christian Social Union receives 27% support. The real shift, however, is the Greens’ success so far with 22% support, according to the Politico poll tracker. This would mean that the party led by Annalena Baerbock would most likely join a coalition and oust the center-left Social Democratic Party.

A poll published on Tuesday now has the Greens at the top.

The Prime Minister of North Rhine-Westphalia and head of the conservative party of the Christian Democratic Union in Germany, Armin Laschet, will hold a press conference on April 20, 2021

tobias black / Agence France-Presse / Getty Images

The PredictIt assigns a 46% chance of Laschet becoming Chancellor on December 31, followed by Baerbock with 32% and Merkel with 9%.

Christian Schulz, an analyst at Citi, says a so-called black-green coalition is the only possible outcome of the September 26 elections.

The Greens would likely push for more government spending on environmental initiatives. According to Dario Perkins, managing director for global macro at TS Lombard, a London-based research service, they could potentially exclude public investment from the zero-deficit rule in Germany.

Citis Schulz agrees. He would expect a black-green coalition to pursue “ambitious” climate change policies backed by large public investments but paid for by borrowing rather than tax hikes. A two-thirds majority would be required to circumvent the constitutional debt brake, which Schulz says is possible because the SPD and the opposition party could agree to the opposition.

It’s a development the financial market is gradually pricing in, although it’s hard to see that COVID-19 vaccination efforts in Europe have improved after a slow start.

The return on the 10-year German Bund
BX: TMBMKDE-10Y

rose after Baerbock’s selection and the euro
EURUSD, -0.25%
has rallied $ 1.17 from its late March lows.

It is not inconceivable that the more charismatic Baerbock will become chancellor and not just a partner in a coalition government. “A left surprise in September is ultimately an upside risk for assets in Germany and the Eurozone,” say analysts from BCA Research. “A proactive budget turnaround would have a positive effect on the growth prospects and support the German and European cyclical sectors such as industry and raw materials as well as the currency. A lower European liquidation risk premium will also support the euro and would narrow the spreads on peripheral bonds. “

Holger Schmieding, chief economist at Berenberg Bank, says both Baerbock and SPD leader Olaf Scholz are pragmatic – but not if they govern together instead of with the CDU / CSU alliance.

Berlin’s rent ceiling – repealed by a German constitutional court – would be the kind of policy such a government would pursue, he says. “A ‘green-red-red’ coalition between the Greens, the SPD and the Left Left Party without corrective elements from the CDU / CSU or FDP could initiate a significant shift in German politics, in particular towards a smaller workforce, housing and products would reduce German trend growth, ”he says.

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