Submitted by Bill Blain of Mint Partners
Blain’s Morning Porridge EXTRA: “WHAT ABOUT THE GERMANS”
It’s unusual for me to write a follow up to the Morning Porridge – but following some conversations and reading about the end of “Peak Merkel”, I fear I’ve considerably underestimated the risks raised by the inconclusive German Election.
We are now facing a period of intense political bargaining, weak government and even the potential of a second German vote.
As a result, the prospects for more volatile European peripheral markets, particularly Greece and Italy, are likely to be exacerbated, and we might well see some of the currency and European stock market froth blow away in coming days as the scale of the “German Problem” becomes clearer.
- My worst case Germany scenario is a second election early next year, political uncertainty as Mutti Merkel finds herself squeezed out, and a scramble to build a new coalition government in her aftermath.
- The best case scenario isn’t much better: that Merkel manages to forge a new coalition, but it will be a long drawn out affair and the resulting administration will be vulnerable, weak and fraxious.
These sound like German problems, but they mean the “leader of Europe” is likely to be entirely inward focused in coming months/years.. at a time when the European union will be facing a host of new issues regarding closer union, banking union and reform of the ESM, bailout and QE policies. There will also be new potential crisis points – Italian elections next year, Greece bailout, renewed immigration crisis or a blow-up with Trump. And these are just the known unknowns.
My fears for Germany are as follows:
- It could take months rather than weeks for the coalition to be agreed. Any Jamaica variant – CDU, Greens and Free Democrats will be weak. The SDP aren’t going to play in coalition, but could stay neutral outside having learnt (like the UK Liberals) that standing to close to power got them torched.
- There is a significant chance we won’t get a coalition deal – which is not being factored by market. Senior German insiders tell me there is a 35% chance of second vote. Some contacts close to the FDs are saying 50%.
- Even if a new coalition is agreed it’s going to be very left leaning and much weaker than the previous Merkel Christian Democrat Alliance administration. (Even the CDU alliance is under pressure from the increasing strident Bavarian Christian Social Union – who remind me of Theresa May’s new found chums in Northern Ireland.)
- A new coalition is going to be a fraxious grouping of contradictory bluster.
- Germany is likely to be far more inward looking under this next administration and therefore less focused on sorting our European problems. Whoever fills the Finance ministry, their default response to any developing crisis in Europe will be ”Nein”!
- Germans are not used to multiple elections – and a second vote early next year would be massive negative for Merkel herself – she may even have to stand down if coalition looks like falling. That could be massive shock.
- The coalition parties all feel they will benefit from swings towards them because of the success of the right-wing AFD. That is going to push them both to demand more in negotiations with Merkel, and to fear a second election less. Both the FDs and the Greens are going to push for big concessions and a bigger role in the negotiating phase of the new coalition. They both feel a second election might play to them if folk switch to them in fear of the scale of the AFD vote, plus they see Merkel as damaged goods. They are apparently willing to push it right to the wire and don’t fear a second vote. The Greens and FDs are diametrically opposed on many policies. Common sense will not be a common commodity.
- This has profound implications for the so-called French/German axis as it slides towards Paris. We are not going to see a new German government “waste time” on issues like closer EU union, European Banking Union, or critical finance issues like reforming ESM or new approaches on QE and Bailout funds. Forget Wiedemann for ECB president, it’s more likely to another Frenchman (Trichet II) – I’m sure its already underway.
In short.. Germany negotiations could get very fraxious while Europe is dragged down in its wake. I doubt the markets have discounted it yet.