The Euro Suffers Because Of Angela Merkel, But Not Sovereign Debt

The euro suffers for Angela Merkel , but not the soverign debtMerkel wishes to remain in office until 2021

The bad results in Hesse, accompanied by national polls which suggest that the CDU would only get 24% of the votes in elections for the chancellery, has forced chancellor Angela Merkel to take a step back. Merkel will not present herself for re-election as party leader at the CDU congress on 7-8 December, although she has expressed the wish to remain as chancellor until the end of her term in September 2021.

The question for the analysts at Intermoney is whether this double-headed leadership will work against the electoral interests of the CDU.

“It is a fact that in the past Merkel´s position was explained as being in favour of the same person holding the positions of party leader and head of the federal government.”

However, although the torment in the CDU/CSU is visible, the weak link in the grand coalition is the SPD, being the party which could precipitate a crisis in the government, and recent events point in that direction. The leader of the SPD, after the results in Hesse, was blunt: “The state of the government is unacceptable and it is necessary to define a new road map to decide, in the middle of the legislature, if this government is where we should be.” She also added: “Something must change in the SPD. Our party has a lot of work to do. We must make clear again what social democrats defend.”

In other words, the SPD blames their role in federal politics and, if the CDU/CSU don’t accept re-thinking the government´s line, the break will come sooner rather than later. As the experts at Link Securities explain:

It remains to be seen if the already fragile coalition government of conservatives and social democrats can last until then, which could mean that Germany also enters the political uncertainty, with the populists parties of left and right threatening to become ever stronger. This is the same situation as several of the principal economies of the Eurozone and investors don´t like it.

The market reaction to Angela Merkel’s decision has been quite good. The euro depreciated to 1.1373 against the dollar, but sovereign debt suffered more because of the greater risk appetite, and the returns on 10 years German bonds rose to +2.5 bp. However, given that Merkel has held the role of a stabilising figure in Europe, some analysts expect that the long term markets could be concerned by the vacuum she could create with her departure.