Home Business Barclays Says Merkel Likely To Remain In Power, But Watch For Surprises

Barclays Says Merkel Likely To Remain In Power, But Watch For Surprises

German elections are likely to occur September, a Barclays report noted. While German Chancellor Angela Merkel and her Christian Democratic Union (CDU) is expected to remain a collation partner, the issue is how that partnership will take place. Markets appear complacent with a Merkel victory, which Barclays says is likely, but they warn that a surprise could result in a significant market negative due to complacency.

German politics becoming more fractured, with six parties for the first time since 1957 likely to end in Merkel win regardless

The exact date of the German election is likely to be September 17 or 24, dates recently approved by the government. The German president will determine the date.

The German election could result in a more fractured political situation, Barclays European Economics analyst Olga Tsckekassin observed in a January 13 piece titled “Coalition conundrum.”

The “conundrum” comes in play on several levels. Most notable, the fracturing political landscape is going to make building a collation more difficult. The German parliament is likely to include six parties – CDU / CSU, SPD, Greens, AfD, Left and FDP – rather than just four parties, a change that has not taken place since 1957.

Currently German polls show Merkel’s CDU / CSU union ahead of all other options, polling at 36%. If the CDU is apart of any collation, Merkel is expected to remain Chancellor.  This comes despite Merkel’s personal popularity falling in the polls after the region’s migration issue. Before the migration crisis in April 2015 her support topped out near 75%, falling to a migration crisis low near 45% one year later.

Since German reunification, trends are clear. Of the off-center parties, the Green and left parties have gradually trended higher in support, while the Social Democratic Party (SPD) has been declining since the 1990s, moving from near 35% to 20% in current polls. The SPD losses could be some of the smaller party gains, with potential for a three-party collation to lead the government.

Of the now six parties, the anti-migrant AfD has increased the most over time, but is still a decided minority, having moved from 5% during the Merkel era to over 10% now. Tsckekassin says that the party is too small to endanger a grand coalition that would likely be led by Merkel, but the party has consistently performed better than poll numbers, a recent trend for such parties in the UK and US.

Grand collation may turn from couple to threesome

All eyes are likely to be on the “grand collation,” a concept that has driven German political leadership for years. “If the grand coalition loses the majority of seats, no other two-party coalition would be possible and the only option remains a three-party coalition – likely under the leadership of Merkel,” the report said.

If the traditional political union does not dominate, and polls shift somewhat to the left, Tsckekassin expects a SPD-Left-Green coalition to provide a viable alternative for office, leaving both Merkel’s ruling party on the sidelines along with the far right AfD.

The grand coalition is nearing the end of its second term and a decline in popular support appears to signal voter fatigue. However, the alternative potential party coalitions have no experience in government at the federal level and therefore carry the risk of the unknown. The CDU and CSU parties cover distinct geographical areas in Germany, eg, the CSU runs in Bavaria but not in the rest of Germany, while the CDU does not run in Bavaria. Both parties have a similar political profile and work as the “Union” on the federal level, typically together with either the FDP or the SPD. The SPD has previously formed coalitions with the Union, the Green party or the FDP (1969-1982). A Union-Green, “Jamaica” or a “R2G” coalition remain untested at the national government level.

Barclays thinks given current polls and looking at probability path analysis, a grand coalition and a continuation of Merkel’s Chancellorship is the likely outcome.  However, this leadership is likely to take place from a weakened leadership position relative to her current power.

While the most likely outcome is Merkel remaining in power — and this outcome remains Barclay’s baseline economic forecast – but there is risk. The markets could be underestimating the potential for an election surprise, Barclays said, noting the one consistent over the recent elections: surprise outcomes.