German elections: Do they matter?

With Merkel in pole position to take the Chancellor position for a fourth term, how might the fight for coalition partner affect the EU and markets?

German elections: Do they matter?

Sunday see's the German people taking to the polls to elect their next chancellor. And despite Martin Schulz and the Social Democratic Party's (SPD) best efforts it is looking ever increasingly that Angela Merkel and the Christian Democratic Union (CDU) will take office for a fourth term.

Merkel appears to have timed her dip in popularity perfectly. This month saw a survey that earned Merkel her highest approval rating since the fall in 2015 when she opened Germany's borders to nearly a million asylum seekers. Over 65% of those who took part said they were satisfied with the job Merkel is doing as Chancellor.

So with this seemingly easy win for Merkel, does that mean more of the same for the European Union?

Short-term

In the short-term, yes pretty much. German investor confidence sharply picked up in September, the DAX is showing no sign of vulnerability and the volatility of the DAX has plunged. All the above suggesting the markets have no anxiety towards the German elections on Sunday. 

DAX Volatility Chart

Long-term

Now, in the long-term, this election could well shape the future of the EU. If Merkel does come out on top on Sunday, she will need to choose a coalition partner. 

One of the major topics at the moment is eurozone integration, with a proposed eurozone finance minister and budget on the table. Merkel's options for coalition differ greatly on this subject, so her choice will give us an idea of the plans the CDU has for Europe.

The liberal Free Democratic Party oppose further integration whilst the Social Democrats and Greens are in favour of it.

What about Wolfgang?

The other interesting aspect to watch is what will happen with the German finance minister position. If the potential coalition partner manages to claim the high-profile post, what then happens to Wolfgang Schauble?

With a number of EU and eurozone presidency positions soon to be up for grabs in the coming years, it's not unlikely to see him take one of those roles.

The knock on effect of Schauble taking a high-profile position means that the chances of a German taking over from Draghi as ECB president reduces. Giving the Germans too many high ranking presidency jobs may be too much for member states to handle.

With that in mind, having a non-German as ECB president may see a slower policy of rate normalisation and a lower euro. 

Watch the finance minister position

This is all speculation but it is definitely advised to monitor who will take the finance minister position in the next German government. The ripple effect could affect the architecture of the EU for the next decade.

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