Angela Merkel’s Christian Democratic Union party has emerged the largest party with a 33 percent vote share in general elections. However, with its main coalition partner, Social Democrats (SPD) preferring to sit in opposition after a steep erosion in vote share, Germany is staring at political uncertainty.
The structure of the new alliance will affect the form and pace of Eurozone reforms, according to Germany watchers.
In the short run, the Euro could be choppy, tending towards weakness. Eventually, the currency will be guided by the European Central Bank’s efforts towards normalization of monetary policy. Indian exporters to Eurozone should keep an eye on the unfolding political landscape and the monetary policy meetings later in October.
Merkel stays but political equation changes
The other major development has been the rise of the far-right Populist Party – AfD, which won 13.5 percent voting share (vs. 4.7 percent vote share in 2013). AfD is said to have benefited from the public disenchantment with Merkel’s decision to allow Arab refugees into the country.
Political parties change in voting share and expected seats
Source: Guardian
Coalition options not easy to sail through
The key feasible option for coalition being talked about is the three-party tie up, “Jamaican coalition”, between the CDU/CSU, the FDP party (11 percent) and the Greens (9 percent). They have already worked at the state level (Schleswig-Holstein state) but has not been tried at the federal level. Greens and FDP are considered to be arch rivals and getting them to sit on the same side of the table is expected to be hard work.
Various other options have been speculated upon like the alliance between the SPD, Die Linke and the Greens but this would not fetch 50 percent majority. Any possibility of coalition between CDU and AfD has been negated by both the parties.
Source: Guardian
Eurozone reforms at stake
A prospective coalition partner for the Merkel-led alliance, FDP, had earlier asked for phasing of European stability mechanism bailout package and provisions to allow countries to leave the euro zone by changes in treaties. Similar demands and coalition dynamics could possibly jeopardize the progress in Eurozone reforms guided by the Macron-Merkel deal.
ECB through its quantitative easing programme has been able to tide over the debt crises and drive the economic recovery. However, in future, for Eurozone to meet the challenges of another economic crises, it should have an independent structure. And that’s why a strong reform-oriented coalition government is the need of hour.
Eurozone reforms topics under Macron-Merkel deal
Source: http://www.politico.eu
EUR/USD – Volatility
EUR/USD, which had a decent run, recently backed by improving fundamentals and possibility of a change in ECB’s stance can possibly take a breather now. It’s noteworthy that EUR/USD has rallied by 14 percent year to date and the rupee with respect to the Euro depreciated by 8 percent. While export-oriented companies to Eurozone would have benefitted from this trend, which was unlike the trajectory for USD/INR, coming days could witness currency volatility due to political developments.
Chart: currency movements
Source: Moneycontrol research
Having said that, in the near term, crucial events to watch out for Eurozone would be related to the formation of government in Germany. At the same time Macron’s attempts for a detailed announcement on Eurozone reforms is another aspect to watch out, wherein it’s practical feasibility would be debated and tested.
However, in the medium-term, currency movements should expectedly align to the monetary policy development. While RBI’s policy meet on October 4 would further deliberate on the concerns around low growth and the recent uptick in inflation, ECB’s (European Central Bank) policy meet on October 26 could bring up a plan for phasing out its QE (quantitative easing) programme, amidst economic recovery. If the latter pans out, as expected, there could be further legs to the Euro appreciation.
Anubhavsays 