After almost 16 years in office, German Chancellor Angela Merkel is set to step down in September. For a long time, the coalition between the Christian Democratic Union (CDU) and Social Democratic Party (SPD) gave investors steady domestic and European policy without many surprises. However, with the recent polling surge for the Green Party and the relatively tepid embrace of the CDU’s Armin Laschet as a potential new chancellor, it looks like change is on the horizon, with a new governing coalition including the Greens.
We should highlight that the Green Party is already well established in Germany, as the senior coalition partner in Baden-Wuertemberg and the junior partner in Hessen with the CDU. The Greens’ experience and agenda go far beyond ecological change.
For now, polls imply a strong chance that the Greens will be the junior partner in a coalition with the CDU in September. In that scenario, they will have the ability to, at a minimum, get some of their campaign goals into government policy. We believe the most important policy for Germany in recent history was the introduction of the famous “Schuldenbremse,” or debt break, in 2011, which since then has required states and the federal government to limit investments and to reduce the outstanding debt stock. (Due to COVID-19 the debt break is currently suspended.) Is this requirement set to go if the Greens take power? Not necessarily. But, there is already a cross-party consensus that it will at least have to be amended to allow for more investment—of which the Greens would like to see €500 billion over the next decade.
There is a good chance that the parties will find a common ground to allow for increased spending, although it is unlikely to be as high as the Green Party desires. On the Eurozone level, an important fresh impulse can be expected: From arguing for an increase in size of the recovery fund, to completing the banking union and giving the EU more fiscal power, the Greens might just provide the initial push that is needed to move things forward, although concessions are likely.
With only three months to go until the elections, we believe investors will start to focus on this shortly. Especially in the absence of tapering discussions by the Fed and ECB, the spotlight will be on higher spending and changing fiscal policies, and the likely impact on the euro, Bunds and EGBs.