The most important election of the year and the most important in a generation for Germany is taking place on Sunday. After 16 years in power Angela Merkel is handing over the reins. The testament to her successful career has been the consistently high poll ratings among the broad population who seemed to value her cautious approach as well as her realpolitik attitude.
But who is going to take her place and more importantly what does the transfer of power mean for investors in Europe’s biggest economy?
The impact of Covid-19 and climate change
Initial plans of transferring power to her anointed successor, Annegret Kramp-Karrenbauer, proved unsuccessful, leading to the more recent justle for power within her CDU/CSU coalition party. With Jens Spahn having thrown in the towel potentially too soon, it was between the centrist but uncharismatic Armin Laschet, the Bavarian PM Soeder and Friedrich Merz who had a personal feud with Merkel from the past. The latter two were considered too right for the party with the likelihood of splitting the potential centre vote between the Greens and SPD, thus Armin Laschet was chosen as a compromise candidate to take on the mantle from the centrist Merkel.
We have broken down the last 18 months into five distinct periods, which define the political changes within Germany.
Period A - pre Covid-19
The CDU/CSU had maintained a comfortable margin against the second party, the Greens. The uncertainty of Trump and Brexit played into the hands of Merkel in terms of stability and continuity, while the generational shift towards climate change helped Greens come to a more prominent position. In the meantime, the SPD’s representation remained low after having ‘sold its soul’ to a third junior coalition position with Merkel, but also the latter’s shift more towards the political left.
Period B – Covid-19 happened
Merkel’s decision to provide unprecedented stimulus to help the recovery and support households and businesses proved critical. It is worth noting that instrumental in this decision was the finance minister Olaf Scholz, today’s SPD nominee. The financial support alongside the relatively contained cases of Covid-19 compared to other countries in the region, partly due to well-funded hospital care, helped the public mood and the incumbent party to all-time highs.
Period C – Vaccinations
While the decentralised economic and political model of Germany in its 16 federal states proved critical in the Covid-19 crisis as the economy was not dependent on one region / city like Paris or London, it proved an anathema for the dissemination of vaccines as the logistics and processes between regional hospitals and distribution centres did not exist. The shine came off Jens Spahn, health minister and candidate for the top job, who will certainly be back on the front stage at the next election. In the meantime it was the Green’s new star Annalena Baerbock who benefitted from the public’s and younger generation’s frustration and led her party to a brief period of euphoria overtaking the CDU/CSU in polls during May.
Period D – back to normality
The economic recovery helped the CDU/CSU regain its composure widening the gap with the Greens. Unfortunately for the Green party, both CDU/CSU and SPD had been shifting towards more ‘green policies’ taking away the raison d'être of the Greens and leaving them more as a party of protest.
Period E – the big surprise
The SPD rose from the ashes with Olaf Scholz becoming the potential candidate to replace Merkel and potentially kicking the CDU/CSU out of government for the first time in 16 years… So what triggered this sudden turn of events? Clearly it couldn’t have been a sudden sharp change in sentiment of the electorate towards the ‘left’ nor was it a stronger consciousness for the environment and climate policies as the Greens’ allure has also fallen.
The Personality Cult
The significant shift experienced since mid-July can be explained by the popularity of the three respective leaders, which have changed dramatically over the summer. Voters seem to have put aside party preferences and policies (which are nowhere to be seen) and have instead focused on the personality of the potential leader.
It is not a coincidence that Laschet’s trajectory started turning downwards from 15 July, two days after the devastating floods in Germany, which killed nearly 200 people. He not only failed to depict the leadership and nous of leaders with similar experiences in the past (see Obama’s hurricane Sandy response with Chris Christie in 2012) but was caught by the TV camera unaware and laughing during the German president's flood address. Similarly, Baerbock’s allegations of plagiarism on her new book have also cost her the credibility she required for that role – a reminder of the earlier “Dr Googleberg” embarrassing saga a decade ago with Karl-Theodor zu Guttenberg, an uprising star of the CDU party and German Defence Minister, resigning on March 2011 after criticisms of plagiarism on his doctoral thesis.
The icing on the cake have been the last two (of three) TV debates. The first televised debate of 29 August was won by Scholz and picked as the winner by 36% of viewers, according to a Forsa poll for broadcasters RTL/ntv. The Green’s Baerbock was second with 30%, whilst CDU/CSU’s Armin Laschet was last with 25%. During the second televised debate on 12 September, a snap poll for ARD television taken soon after the 90 minute debate showed that 41% of those asked thought Scholz was the most convincing performer, compared to 27% for Laschet and 25% for the Greens candidate, Annalena Baerbock according to Reuters.
What are the models saying?
So, what should we be expecting? The Economist’s forecast model indicates a tight race between the SPD and CDU/CSU. What we haven’t mentioned already is the gradual uptick experienced by the Free Democratic Party (FDP) since the start of the year which rose from 7% to 12% placing them in a strong position to become a kingmaker as well as potentially securing FDP’s Christian Lindner with the prestigious post of finance minister.
The first three party coalition?
If we exclude the possibility of another grand coalition led by CDU/CSU as that was the anathema which caused SPD to deteriorate over the past few years, there are a number of coalition scenarios, depicted by the Financial Times, which are worth considering. Most importantly, we could see the first three party federal government coalition in Germany’s history.
This increasingly probable event would occur by the so called Ampel (traffic light) coalition of SPD (red), FDP (amber) and Greens (green!). Apart from a seismic shift in German domestic politics it also reflects the continuing broader shift we have alluded to with citizens tending more to the left as social inequality, economic policy intervention and climate have come to the forefront of the public’s concerns.
Impact on Economics and Geopolitics?
Friedrich Merz and Markus Soeder would have tried to shift policy and economics more to the right, distancing Germany from the EU with a more nationalistic agenda and domestic focus. Whereas Laschet and Scholz are both centrist and the latter with a proven track record of having successfully guided the economy through one of the country’s more severe economic crises.
Hence, we expect the EU to be stronger and more aligned with either at the helm, pushing towards further economic and political integration. This may potentially pick up speed partly due to the US’s disengagement from the region as we have seen through Afghanistan, as well as Macron’s long time push for a stronger defence strategy. However, with the French Presidential election in April/May 2022 it is unlikely for any key policies to be announced before both new leaders are set in place. Further out, the relationships with China and Russia are also expected to remain constructive.
The economic agenda under any party coalition is expected to shift towards the left as has been the case across the Western world to deal with both rising social inequality and climate change. It is not only President Biden’s push for fiscal packages, but the recent increase in taxes from Boris Johnson’s conservative government and even the potential victory of the Norwegian left of centre party, potentially having all five Nordic regions with a left leaning government for the first time since 1959!
With the risk of inflationary pressures rising, as per our recent research report, where we do expect a battle between Germany and the EU is not between the parliaments, but instead between the central banks - and in particular the ECB against the German Bundesban’s Jens Weidmann.
Impact on the Industry
We believe the impact on the hospitality industry will not be that different between Scholz and Laschet, for a number of reasons:
- Socio-politically, citizens in the West are continuing to shift to the left in terms of socio-economic policies, especially since Covid-19 with ample monetary stimulus and supportive fiscal policies in place to protect jobs and industries. In the US we have seen the acceptance of stimulus packages by the broader public; in the UK we have just had the Conservatives enacting tax hikes historically conducted by the Labour Party; in Germany we have already seen the shift towards the centre where Merkel had already taken the party, but also a resistance from the CDU/CSU members to select a Merz or a Soeder on the fear of splitting the centre and helping the SPD and Greens.
- Social, income and wealth inequality have become more prevalent since the Global Financial Crisis triggering political tides which brought in Trump, Brexit but also the gilets jaune in France. ESG is not only about climate change and the environment, but also about fairer taxes, higher incomes and equality, which come under the ‘S’. These issues will have to be addressed by whichever party / coalition comes together. Hence, the shift to the left continues irrespective of who the Chancellor will be.
- In terms of the economic policy, the difference will not be that dramatic. Olaf Scholz is pragmatic and aware. He is aware that his credibility with markets hinge on his economic policies and thus unlikely to risk unorthodox economic measures that put at risk Germany’s position. At the same time, the ample stimulus of economic support during Covid-19 has to be paid back. Either way, we expect taxes to rise and regulation to tighten. One key question is whether FDP’s Lindner is willing to compromise on this point, with the proviso that he takes the post of finance minister in a coalition.
- As for monetary policy, it is the only point of contention we see between Germany and the EU with Jens Weidmann standing firm on the potential inflationary pressures at play. Although we see rising prices coming through, we believe the credibility of the institutions and the toolkit at their disposal will prevent rising prices from becoming an inflationary crisis. Hence, we expect yields to rise but remain broadly contained alongside funding costs.
In conclusion, we expect higher taxes, higher labour costs, higher supply costs and tighter regulation – whichever party / coalition comes to power! Politicians in our view will be price takers, driven by the significant shifts in socio political thought and economic necessity.