Market Comment: German coalition talks to next level

News item -

German coalition talks took a huge step on Sunday, but there is still a long way to go. On Sunday, delegates of the SPD approved the coalition agreement between its party and the CDU/CSU.

Chancellor Angela Merkel’s party CDU/CSU has reached an agreement with the social democratic party SPD on the major policy guidelines, after four months of exploratory talks with various parties. The Social Democrats, however, were not too eager for another coalition with the Christian Democrats, which would result in the fourth consecutive term for Merkel. It was therefore questionable whether the SPD delegates would approve the results of the exploratory talks on the SPD convention on Sunday.

With the positive outcome at the SPD’s party convention, there is only one last hurdle left: The SPD will put the final coalition contract to the vote for all party members. A failure to form a coalition is still possible, but the likelihood has certainly increased of a new so-called ‘grand coalition’ between SPD and CDU/CSU. 

Moving towards business-as-usual

In our view, another grand coalition will mostly mean business-as-usual for Germany and Europe. Even though SPD and CDU/CSU suffered historically bad election results in September 2017, they still hold a comfortable majority of 56% of all seats in the parliament and have the strongest influence of all alliances in the upper house. A stable government in Germany is expected to have positive effects on the overall political situation in Europe.

The  euro should see support as well, since the coalition agreed to continue the course of financial stability and balanced budgets. The party leaders signaled willingness to increase investments for an intensified cooperation within the monetary union, which is a good sign for the countries in the European periphery. Together with the recent credit rating upgrades of Spain and Italy, the agreement to start coalition talks could mean additional support for peripheral government bonds, which have shown a robust performance since the sovereign debt crisis.

Restrained market impact so far

We expect markets to be muted in reaction to the approval of the SPD. Indeed, so far, market reactions on the ballot have been restrained. Ten-year German Bund yields continued to trade at around 58 basis points and the EUR/USD exchange rate has not shown any significant reaction yet. If the grand coalition eventually materializes, we expect the supportive growth scenario in Germany and Europe to continue.