Ms Merkel has failed to build a new government as coalition talks broke down yesterday – FDP took the decision to leave as they felt compromised in strategy paper on the table, mainly on refugees, but also environment and energy. This has already sent the EUR-USD lower 1.1800 to 1.1750 and we expect the uncertainty to spill over into markets as both Merkel’s faith and overall German leadership is on pause. There is rising chance that Merkel could resign (25% from 0%) but most likely we will have new German election in the next 60 days. We, John Hardy, sees positive EURUSD bias as intact as long as 1.1675-ish area holds.
A Grand coalition (20%) – the repeat of last elections sharing of power between SPD and CDU/CSU. This is extremely unlike as party leader Martin Schultz been running on agenda on “being the opposition”
Having said that there could be movement in this possibility if:
– MS Merkel steps down – The SPD through Thomas Opperman, the Vice-President of the Bundestag has indicated that if Merkel resigned then “…in der Tat eine neue Situation” (Then that is a new situation)
– It also expected that Bundespräsident Steinmeier will apply pressure on his own party, considering that the only true majority sits with Grand Coalition.
– Finally, it’s well known that Foreign Minister Sigmar Gabriel is, former SPD-Head, is keen on remaining in the Foreign Office.
Minority Government (20%) – this with the Green or FDP. There is no history of minority government in Germany since World War II, and in political turbulent times, the German politics generally wants to avoid a Bundestag where an vote of confidence in constantly around the corner. The only appealing part of a minority government is the alternative: A new election
New election (60%) – now considered the most likely. There is however procedural issues which needs to be cleared first: First the new Bundestag must be dissolved. This could happen through a simple vote of confidence. This was used by Brandt, Kohl and Schröder before, but Merkel is blocked this procedure as she is only “caretaker Chancellor”.
This means Bundespresidänt Steinmeier according to Article 63 in the Constitution suggest Merkel as Chancellor – this then go to a vote – if accepted then The Bundespräsident has two options: To appoint Merkel Chancellor or dissolve the Bundestag. He has seven days to make this decision and a new election should be held within 60 days.
There is a real sense of “shock” in German politics this morning – the Zeit Newspaper: Under the headline: Failure in slow motion, leaves no doubt that The Greens and CDU is left behind shocked as FDP leaves the talks.
To me this is yet another example of how “more of the same..” is not going to cut it for politicians globally – the “safe pair of hands” slogan have voters revolt – Post the election in Germany in September voters were very disappointed that the real issue: Immigrations was not discussed. Voters, despite their lost trust of politicians, still look for direction on immigrations, environment and energy.
Merkel just found out that “not talking about it…” no longer works. The next few weeks in German politics will be wakeup call: Merkel could be gone if no new election takes place, or Germany could be in a new election campaign where hiding from the three issue above will cost votes and leaves Far-right and Far-left parties, with clear yet primitive messages, in the lead.
Germany and Merkel has been Europe’s leader through the difficult 2000s and 2010s mostly through defensive and slow guidance, now however under time constraints Germany needs to find a new path.