Merkel wins

Merkel Wins. Coalition Woes Remain.

While Chancellor Angela Merkel celebrated the “super result” election win in which her party, the Christian Democratic Union (CDU) and its sister party acquired an incredible 41.5% of the vote, the business-friendly Free Democratic Party, the junior coalition partner after the 2009 election, experienced an unprecedented defeat with barely 4.8% of the vote. For the first time, FDP, which has served as a junior partner in government for 46 years since the 2nd Word War, finds itself in the unenviable position of having below the 5% of the vote needed for seats in parliament.

Agonizingly short of majority, Merkel’s party will need to find a coalition partner to form the government. Either way, whether with the Greens or with the Social Democratic Party (SDP), Merkel’s no-nonsense approach of austerity-centered bailouts that have managed to keep the Eurozone countries out of bankruptcy, is now facing hostility from tax-payers at home. Rising domestic protests have severely restricted her capacity to sustain fraught Eurozone economies. An indication of this hostility is the 4.7% votes that the Anti-Euro party, Alternative for Germany, won at the election this time that severely cut into the FDP’s vote bank. The Eurozone crisis is far from over. The German treasurer has hinted that Greece may require more help, while Portugal and Slovenia are both struggling to meet their sovereign debt payments.

Germany had to take the helm, even if grudgingly, as the Eurozone economic crisis spiraled out of control. With its strong economy and stable government, Germany had to take on the strong leadership mantle since it is the sole European country capable of lending money to struggling Eurozone economies. As Merkel struggled on the one hand to bail out collapsing debt-ridden countries like Greece, Portugal and Ireland, she has also had to stem mounting euro-skepticism and hostility to further bailouts at home. Yet, Germany has been censured for not doing enough to help Europe get out of its economic crisis. It has been alleged that German bullying made vulnerable, debt-ridden countries foist adopt austerity measures on its citizens, and primarily, Germany’s reluctance to accept the introduction of Eurobonds, has been critiqued.

It seems likely that Merkel’s CDU will form the coalition with the SPD, the opposition party that won about 25% of the votes. Moving from a coalition with a Left of Center FDP to a Right of Center SDP will definitely move the coalition to a more conservative base. The Social Democrats have formed a successful coalition with Merkel during her first term (2005 – 2009). This “grand coalition” that unites the country’s two largest political parties would also have a majority in the upper house of parliament, the Bundesrat.

Although the SDP is resistant to ECB bond purchases, the party has openly supported the introduction of Eurobond. Moreover, the SDP supports financial backing to debt-ridden Eurozone economies, and akin to Merkel, insists on belt tightening for them. This means the continuation of the status quo for Greece, where Merkel is a strongly polarizing figure.

Immediate Impact on the Market

In the last few weeks, US investors have provided large amounts of capital to the European markets, amounts not heard of since 1977. Yet, shares in Germany are declining since the news of Merkel’s victory. This is not due to her unpopularity with the markets and till the ongoing uncertainty regarding the coalition is stabilized, the markets will continue to remain jittery.

Since the FDP, with its less than 5% seats, cannot partner the CDP this time, Merkel’s party will have to look to the SDP to form the government. Markets are worried that the SDP can rock the coalition boat anytime over the next four years whenever they see the political wind blowing on their side. As the likelihood of a collation with SDP increases, the stocks of residential land owners are falling. SDP and CDP both support rent controls that will affect the likes of LEG Immobilen or Deutsche Wohonen AG, the 2nd largest and largest residential landlord’s in Germany. Both stocks are underperforming the markets and were down yesterday more than 3% and 1% respectively.

There should be no medium term effects on the DAX or on US ADRs of German companies like Deutsche Bank (NYSE: DB). The CDP victory was not a surprise and the markets had mostly priced it in. Once the coalition is in place, the markets will move back to its earlier levels.

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