Germany’s Chancellor Election and the Global Market: End of the Merkel Era

By Haley Wadel

Germany, the European Union’s largest economy, will be electing a new chancellor for the first time in 16 years. Angela Merkel, the first female chancellor of Germany who was elected in 2005, is stepping down after serving four terms.[1] Merkel is considered the de facto leader of Europe and is considered the most trusted leader by more than 75 percent of adults in 14 European countries; more than any other European leader.[2]

 With Merkel’s presence out of the picture and a new chancellor finding their way into power, a lot is at stake for the market, from the single currency (Euro) to global trade relations and beyond.[3] Additionally, because there is no clear candidate leading the polls, this election could make market waves due to the range of possible outcomes.[4] Berenberg chief economist Holger Schmieding sees the shift towards the center left Social Democrats (SPD) as a negative for market because of its raised risk of protracted uncertainty.[5]

 With the pandemic and long-observed fiscal restraint of the nation, the winner of this election could change the federal borrowing and spending status.[6] For example, the Greens party has pledged spending increased and reformation of debt brake, which is currently limited to just 0.35 percent of the GDP.[7] Joern Wasmund of the DWS states that higher spending and borrowing would lift bond yields that could potentially improve economic growth and the euro.[8] That being said, the CDU and FDP will likely want to keep the debt brake of 0.35 percent.

 Berenberg Schmieding estimates that a leftist party collation would likely raise the risk of tighter regulation to 20 percent to 15 percent.[9] "Whereas tighter regulations of labour, service and housing markets would not have a major impact on the short-term business cycle, they could turn into a serious drag on German trend growth over time. This is the tail risk to watch."[10]

 A recent ZEW survey points out that optimism has taken a plunge ahead of elections.[11] As seen in the past, when optimism plunges, currency is likely to go with it.[12] As of late, the euro has started to weaken against the dollar and is trading dangerously low amid uncertainty of the German election.[13]

 Latest polling data shows that the CDU in coalition with CSU (Chancellor Merkel’s party) has given up its lead to the Social Democratic Party (SPD), the first time in 15 years in which the SPD has led the CDU/CSU alliance in the polls.[14]

 Goldman Sachs also examined the potential outcome of the election, finding three key challenges that Germany will face.[15] Goldman stated that “we see Germany exposed to a number of medium-term challenges, related to the missed structural opportunities during the Merkel years,” Goldman analysts also added that “the next government faces a balancing act between achieving the country’s ambitious climate goals and reaping the economic benefits from the green transition.”[16]

 Germany, a country with some of the most ambitious climate targets in the world, sought to cut its greenhouse gas emissions by 65 percent from 1990 levels by 2030.[17] That is in comparison to the 27 EU nations that together vowed to reduce emissions by 55 percent during that same period.[18] Even though many politicians are acknowledging the need for change, the hopes of limiting global warming and meeting the crucial global target are deteriorating fast.[19]

 A second challenge predicted by Goldman is that “Germany’s export-oriented economy looks vulnerable to ongoing de-globalisation trends.”[20] Germany’s exports reached an all-time high of 1.33 trillion euros in 2019 but has dropped to 1.21 trillion euros in 2020 amid the pandemic.[21] Concerns of supply chain issues, calls for protectionism, the United Kingdom’s departure from the European Union, and the overall stagnant level of global trade may hurt German exports.[22]

 The International Monetary Fund (IMF) stated in July that “[o]ngoing supply shortages of intermediate inputs could last longer than expected, dampening the recovery in exports and investment, particularly for the automobile sector.”[23] The IMF expects that German gross domestic product (GDP) will reach 3.6 percent in 2021 and just 4.2 percent in 2022.[24]

Lastly, Goldman Sachs found that “Germany’s potential growth rate is in the middle of the G-7 pack but will come under particular pressure through demographic change.”[25] Goldman analysts stated that the country “will be affected more strongly by population ageing than most advanced economies, with the dependency ratio rising sharply in coming decades.”[26] An older population can bring fiscal challenges with most costs associated with health and social security services.[27]

In addition to these challenges, the pandemic has once again caused the cancellation of Oktoberfest, the world’s largest annual beer festival. Oktoberfest brings in $1.5 billion for the local economy and averages 6 million visitors.

Between Merkel’s era ending, a new party coming into power potentially for the first time 15 years, and a global pandemic looming, one thing is for certain: we will just have to await the results of the September 26th election.

[1] #1 Angela Merkel, Forbes, https://www.forbes.com/profile/angela-merkel/?sh=654201d022dd.

[2] Id.

[3] Michael Kern, Why World Markets Should Be Watching Germany Closely, Safehaven (Aug. 30, 2021), https://safehaven.com/news/Breaking-News/Why-World-Markets-Should-Be-Watching-Germany-Closely.html.

[4] Dhara Ranasinghe & Yoruk Bahceli, Germany’s Sept election and why it matters to world markets, MSN News, (Aug. 25, 2021), https://www.msn.com/en-gb/news/world/germanys-sept-election-and-why-it-matters-to-markets/ar-AANIUTD?ocid=BingNewsSearch.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Kern, supra note 3.

[12] Id.

[13] Id.

[14] Id.

[15] Silvia Amaro, Germany after Merkel will face three key challenges, Goldman says, CNBC News, (Aug. 6, 2021), https://www.cnbc.com/2021/08/06/goldman-says-germany-faces-3-big-problems-after-merkel-departure.html.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id.

[24] Id.

[25] Id.

[26] Id.

[27] Id.