David Kohl (Julius Baer) | The European political leadership is in transition, with Ursula von der Leyen starting as President of the European Commission and Christine Lagarde as President of the European Central Bank and the Social Democrats in Germany voting for a new leadership. The common denominator of the most recent leadership changes in Europe is more openness towards an expansionary fiscal policy at the expense of austerity, which had been the mantra of the past ten years.
On a European level, Ursula von der Leyen is demanding more investments into projects that help to moderate climate change and improve the digital infrastructure in Europe. The new SPD leadership duo Norbert Walter-Borjans and Saskia Esken are demanding structurally higher investment spending in Germany and are heading for a confrontation with Chancellor Angela Merkel, who opposes deficit spending in general. Demands from the new leadership duo for higher social transfers could be-come an additional challenge for the ruling coalition in Germany and erode political stability. Even though a breakdown of the ruling coalition in Germany is now more likely, it is hardly a done deal. Any confrontation will be centred on the future role of fiscal policy and budgetary discipline. Both coalition parties are constrained in their ability to escalate such a confrontation given their currently poor showing in polls. The SPD faces additional restrictions, given that important political projects like the basic rental payment still have to be processed, which may cause the party to lose a lot of credibility. Hence, political noise out of Ger-many might increase but will hardly be powerful enough to push financial markets sustainably in one direction or another.
The rising popularity of fiscal policy in Europe is more important for the euro than any political noise. Looser fiscal policy has the potential to reduce pressure on European monetary policy, which is already punishing investors with negative interest rates. Less pressure on monetary policy could thus improve the backdrop for the euro even though this shift in policy mix may mean changing government or leadership in Germany or other parts of Europe.