Rabobank: A Very German Daily

By Stefan Koopman, Senior Macro Strategist at Rabobank

The US House of Representatives voted along party lines to approve a budget resolution. This provides the framework for the Democrats to eventually spend up to USD 3.5 trillion to expand the social safety net without needing the support of Republican lawmakers. The standoff between the Democratic Party’s centrists and progressives is not resolved, however, and the eventual spending bill needs to win support from both groups. The party’s leadership hopes to present a bill that can find such broad backing by October 1. In return for the centrists’ votes to move ahead, Speaker Pelosi also committed to hold a House vote on the separate USD 1 trillion bipartisan infrastructure bill by September 27. This was a key demand.

As Democrats make progress with their spending legislation, investors will be required to split their attention between the US and Europe. On September 26, the Germans will go to the polls to elect a new parliament and, ultimately, a new chancellor. After nearly sixteen years at the helm of Europe’s largest economy, and having had to work with the likes of Sarkozy, Berlusconi and Trump, the immaculate Angela Merkel will then finally make way for a successor.

This was always going to be a very open race, as the Christian Democrats started their campaign without much of an incumbency advantage. This became even more apparent after Merkel’s would-be successor, Armin Laschet, failed to garner any enthusiasm among his own voter base, let alone the rest of the German electorate. His public profile even took a turn for the worse in mid-July, after he was being filmed laughing while Germany’s president spoke at the scenes of the devastating floods in Western Germany. Correlation is not causation, so they say, but from the “Laughing Laschet”-gaffe onwards, the polls have tightened significantly.

As any new coalition’s policy agenda is going to be shaped by extensive negotiations, requiring concessions on fundamental interests from the participating parties, personality is at this juncture more important than policy ideas. On this front, it is not looking good for the CDU/CSU. In the hypothetical scenario of a direct chancellor vote, Laschet is expected to win just 16% of the vote, according to this recent infratest-dimap poll. It is an astonishingly weak figure, which stirs up division within the Union. Also of note here is that the leader of the Greens, Mrs. Baerbock, proves to be a fading rather than a shooting star, as she would win just 12% of this vote.

The remaining 72% of these hypothetical ballots of course have to end up somewhere; the surprising news here is that at least one of the candidates has finally managed to become more popular than “none of the above”. This turns out to be Olaf Scholz, the leader of the Social Democrats who currently serves as Merkel’s federal minister of Finance and as her vice-chancellor.

He indeed characterizes himself as the most experienced Kanzlerkandidat, as the one being able to lead Germany through the most turbulent of times. This idea seems to resonate with voters, and, having worked so closely with Merkel that he actually starts to imitate her, he is being seen as the ‘competent pick’. This is again being corroborated by the aforementioned poll, which finds that even supporters of the liberal FDP prefer Mr. Scholz over Mr. Laschet.

The SPD’s gap with the CDU/CSU has been narrowing since mid-July, but for the first time in fifteen years, a Forsa poll now actually has the SPD (23%) inching ahead of the CDU/CSU (22%), whilst opening up a gap with the Greens (18%) and the FDP (12%). The AfD could win 10% and the Left 6%. This opens up a whole range of three-party coalitions, including the much-touted “traffic light” that is comprised by the SPD (red), the FDP (yellow) and the Greens. Although the parties in this coalition would have to bridge many ideological differences on fiscal, foreign and environmental matters, this would end the Union’s reign and be reflective of the structural decline of Christian Democracy in Western Europe.

The broad spread of votes across the political spectrum results in many coalition possibilities, which need to be explored without the authority of a strong incumbent. It is therefore simply too early to say what a “traffic light” would exactly mean for markets; the appointment of ministers is going to be a key factor to see which policies will be accentuated (e.g. how are the Ministry of Finance and the Foreign Office divided between the Greens and the FDP) whilst several ‘red lines’ need to be crossed in order to make this work (e.g. the Greens and the SPD support changes to allow for more public investment, but this is going to be moderated by the ‘small government’ FDP, which *still* believes that a government finances itself like a household; or, the Greens would want a tougher stance on Russia and China, but the FDP will be on the watch for Germany’s strong business lobby).

If the current Dutch experience is anything to go by, it could take until 2022 before a coalition agreement will be struck, and conflicting interests should ensure that any eventual agreement can’t diverge too much from the status quo. Moreover, there is still a month to go, voters can split their vote as the elections mixes proportional representation (with a 5% threshold) with single-district constituencies, and the gaps in the polls are still well within the statistical margins of error. In short: the election is on a knife-edge, requiring investors to start paying attention.