The French Presidential election has been grabbing the headlines as the Penelope-gate scandal looks to have crushed Francois Fillon’s chances, instead propelling Emmanuel Macron as the likely runner against Marine Le Pen in the second round run-off. But even in Germany the elections may well be shaping up to be a close race, although it is still early days as German voters do not go to the polls until 24 September 2017.
Angela Merkel, or ‘Mutti’ (German for mother) as she is sometimes referred to, is running for a fourth term as German Chancellor, and given there is no obvious successor in her Conservative Party this is not altogether surprising. Up until the ‘open door’ policy for refugees and the December 2016 terrorist attack on the Berlin Christmas market, her re-election seemed a foregone conclusion: the German economy has performed well and the country retains a dominant position in Europe. But the CDU party’s disappointing performance in some of the regional elections and the rise in support for the AfD (Alternative for Germany) with its policy to limit migrant numbers illustrate rising voter discontent.
Despite open criticism Merkel has managed to rally its coalition partner’s support for this election: Horst Seehofer, the head of the Bavarian Christian Social Union (CSU) party, which has asked for a cap of 200,000 arrivals per year, has publicly backed her election bid. But Merkel is losing momentum in the polls. A recent Forsa Institute poll gave the Social Democrats (SPD) 31% while Merkel’s CDU/CSU party polled at 34%. What is interesting is the leap in support for the SPD following Martin Schulz, the former head of the European parliament, stepping into the leadership role for the party in January. Moreover, a poll for a direct vote for Chancellor showed Merkel level pegged with Martin Schulz with both at 37% of the vote. Earlier this week an INSA institute poll for the Bild newspaper showed the SPD actually overtaking the Christian Democrats with 31% support versus 30% for Merkel’s CDU/CSU. That said, it is still early days in the electoral process and it remains to be seen whether Martin Schulz can maintain the initial polling momentum.
Martin Schulz’s plain speaking and Social Democrat values seem to be gaining traction with the voter base in Germany. This is perhaps interesting as the SPD is pro-immigration yet this is a factor attributed to waning support for Merkel. Indeed, Merkel has been reacting so some of the public backlash on an open door immigration policy with reports she is looking to enforce a more rigorous policy of asylum deportations, particularly after the market attack where the assailant was a failed asylum-seeker that had not been deported.
If the SPD ended up the largest party then they may have the option to join forces with the Greens and the far-left Die Linke as has been the case in the regional Berlin election, although they would have to overcome some significant policy differences; For example, the Linke Party is in favour of radical EU restructuring, Nato dissolution, is pro-Russia. Less controversially it is pro welfare budget expansion. Thus, this coalition seems more difficult at a national level. The Free Democratic Party (FDP) could be a potential coalition partner, if they got above the 5% of votes needed to get back into parliament, along with the Greens. But with the far right parties gaining share across Europe it is questionable whether the smaller parties would gain enough votes for this. Thus, it is also possible there could also be another SPD/CDU grand coalition but with Schulz at the helm.
As we have warned before political risk is a key driver of market moves in Europe at the moment and European sovereign bonds have had a poor start to 2017 in performance terms. Germany, France and the Netherlands are creditor nations but credits from these markets offer little value on our valuation screens making the risk easy for us to avoid.