The Daily Update - Populism in Germany and the Eurozone

Markets are relatively quiet in anticipation of the main event of the next 24 hours – tomorrow’s Governing Council Meeting of the ECB in Frankfurt (or perhaps for some it is the new iPhone release and Apple keynote presentation later today). However, happenings on the other side of Germany are worth watching too, namely the state legislature win of the anti-establishment Alternative for Germany Party (AfD) in Mecklenburg, home state of ‘Mutti’ Merkel, pushing her Christian Democrat Party (CDU) down to third place. This could turn out to be a significant antecedent to a further rise in the populist anti-immigration AfD Party and even lead to a swing in federal elections in 2017. Current opinion polls put the AfD in the mid-teens which if held or increased would give them enough seats in parliament to encumber the usual grand coalition between the CDU and the Social Democrats (SPD). An even a small interloper in the Bundestag could obstruct political decision making at the heart and industrial engine of the Eurozone, just at a time when reforms and decisiveness may be needed across Germany and the Eurozone.

For Germany, at least, the populist rise is still in its early and (hopefully) fragile days; the large eastern state of Mecklenburg is atypical in its political views and the traditional parties are still in vogue in western states. But the downside surprise has been exactly that in other European political scenes. Consistently in the UK, France, Spain, Portugal, Italy and many others far leaning parties continue to gain momentum faster than most previously expected. If they are anything to go by Germany could follow suit. Almost all the major European economies have become a case study of the political unrest and divisions that can occur when recessions and economic stagnation is felt or even just perceived to be felt by the wider public.

Such dissatisfactions and concerns are much more easily dispelled when a country has the fiscal space to appease working class short term financial strains and dispel worries about taken jobs and inadequate government services. Beyond a certain point, nations with net foreign debts are likely to perpetually reinforce their problems through financial, fiscal and political deterioration; borrowing rates can rocket and public spending evaporates. Meanwhile in the middle of such economic turmoil a nascent radical single-minded party takes the helm to ensure that failure is certain. This illustration is just one indirect reason for why we strongly favour investing within net foreign creditor nations that are inherently far less likely to be burdened with funding a growing deficit (where even private issuers are vulnerable to tax hikes et al.) Germany, however, is of course a net creditor but is saddled with the wider Eurozone economic burden - currently much more so in public opinion than in actual financial obligations. But the public are making themselves heard with their feet and this dissatisfaction will only make further Eurozone fiscal unification more unpalatable and the German government will have to consider their decreasing popularity in the run up to next year’s elections.

In a speech today, Chancellor Merkel called the AfD “a challenge for all of us in this building”; but given Germany’s centrality to the success of the Eurozone and how the AfD are only part of the wider populist challenge across the EU she may have underestimated the breadth of the problem.