By Mike Dolan
LONDON (Reuters) – Germany’s election campaign has burst back into life just a month from the ballot, with standing market assumptions on the next Chancellor and governing coalition upended by a dramatic centre-left revival.
Surging support for the once stranded Social Democrats (SPD) has investors and strategists scrambling to re-assess what seems like a withering array of possible coalition permutations and combinations – always expressed in party colour codings, from conservative black to green, or liberal yellow and left red.
Election research notes now often look more like Jackson Pollocks – parsing ‘traffic light’ combos to ‘Jamaica’-flag style black-green-yellow or ‘Kiwi’ of just green with black.
But betting markets now see almost a 50-50 chance SPD candidate and current finance minister Olaf Scholz will succeed conservative Angela Merkel in the top job after 16 years of unbroken leadership. Perhaps more surprising, the chances of a left-wing coalition without the centre-right CDU/CSU alliance is now seriously being discussed.
After three weeks of opinion poll gains for the SPD, the latest Forsa poll published on Tuesday showed it had pulled ahead of the conservatives for the first time in 15 years.
A little over a month ago, the outcome was seen as a near shoo-in for CDU candidate Armin Laschet – with the SPD trailing the conservatives by a whopping 13-15 points.
But volatile public opinion, which saw the Green Party topping the polls as recently as May, has turned on Laschet – with many citing what were seen as insensitive reactions to severe summer floods in Germany as one key reason.
Although things could shift again over the remaining 4 weeks to the Sept 26 election, more postal votes cast early due to the pandemic restrictions may well capture this latest mood swing.
The PredictIt online predictions market now has Scholz and Laschet neck and neck to replace Merkel by the end of the year. It had an enormous 60 point gap between the two as recently as Aug 1.
According to Goldman Sachs’ George Cole and Vickie Chang markets had most likely been comfortably priced for some form of ‘centre’ coalition outcome – either some form of status quo conservative-SPD return, a conservative-green pairing or a three-way conservative-green-liberal government.
But while latest polling throws up numerous potential concoctions and three-way link-ups, the chances of a left-wing government is now a serious consideration for the first time. According to the latest polls this week, the SPD and Greens are polling more than 40% combined and would be up to 47% if the left Linke party were included.
That compares to 40% support for a conservative-green tie up or 34-36% for both conservatives and the liberal Free Democratic Party together. A centrist conservative-green-liberal combo, on the other hand, still draws 52%.
“UNUSUALLY UNPREDICTABLE”
Should financial markets sit up and take notice yet?
Goldman’s Cole and Chang wrote that a left-wing coalition that include combinations of SPD, Greens and Linke “would likely drive yields higher and sovereign spreads tighter through stronger growth, more issuance and friendlier EU policy.”
Putting some hard numbers on what that might mean, the Goldman team’s model says that ‘Left’ outcome – which at the time of publication late last week they put as low as 15% – would drive German stocks about 1% higher, 10-year bund yields about 10 basis points higher independent of other euro government bonds and euro/dollar about 0.5% higher.
Not huge moves, but clear directions of travel.
And with so many other seismic global market influences in the post-pandemic world, it’s always hard to isolate one impact.
What’s more, don’t hold your breath for a clear outcome on the next government even after the official results of the Sept 26 vote. German coalition building can take eons.
JPMorgan’s Greg Fuzesi said he wanted to see more polling before changing his base case of a conservative-green coalition. But he added it had become “unusually unpredictable.”
What’s more the sheer range of possible two and three way coalition outcomes now mean that post-election negotiations will be “hugely complicated” by tactical considerations and could drag on for as long as six months.
That alone is a reason market prices are not knee-jerking to the eye-catching polling shifts.
Commerzbank’s Ralph Solveen thinks the shape of the coalition is still “completely open”. The only things that can be ruled out, he says, is right-wing Alternative fur Deutschland entering government or an alliance of the left Linke party with either the conservatives or FDP.
“All other combinations are not ruled out by anyone.”
Solveen added “The most unlikely scenario at present is a left-wing coalition of SPD, Greens and Left Party”. But even this could become an option if they were to secure a significant majority together, he said.
For Deutsche Bank’s Barbara Boettcher the fact that no two parties look set to gain an overall majority – as the conservatives and greens had approached a couple of months back – means a three-way link was most likely. In that situation, she felt the FDP could now be the real kingmaker.
As the FDP would probably favour a link to the conservatives and Greens rather than SPD and Greens, they may dictate the orientation of the next government despite their small size.
And outsize FDP influence would push for a resumption of fiscal conservatism, tech-driven climate policy, no permanence for the EU recovery fund and pre-pandemic status quo for European budget rules.
That’s a long way from a left coalition – which would lean in the polar opposite direction on all those issues.
Markets are keeping powder dry. It’s still all to play for.
(By Mike Dolan; Editing by Chizu Nomiyama)
