Steen's Chronicle: Merkel may be the Queen of Germany, but she's missing a Prince...

Merkel may be the Queen of Germany, but she's missing a Prince...

 

http://www.tradingfloor.com/posts/merkel-queen-germany-shes-missing-prince-1093286340

The German election was great for Angela Merkel personally, bad for Germany, and bad for reform in Europe and Germany. While there has been no impact on markets in the short-term, the noise and hence the volatility will increase as no one is willing to join Merkel government.

Standing alone: Who will stand with Merkel?                        Source: Handelsblatt

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Germany is slowing down
Germany is already deaccelerating growth and social tensions are on the rise with the working poor numbering seven million. Add in the emerging market slowdown and you have a cocktail that will start to hurt German exports by the fourth quarter. Being in government is the last place you might want to be as 2014 will see Germany move towards zero growth and in dire need of reforms again. The SPD should stay out of government and it most probably will.

Buit if SPD joins the government in a coalition, the price will be less reforms, not more. EU politics will become less about austerity and more of a Club Med. 

So Merkel is a Queen without a prince and with the DAX and the EURUSD unchanged, the market reaction this morning also reflects this. 

Source: Bloomberg

Horse-trading
With Merkel's victory but subsequent failure to secure a majority, the horse-trading is about to get underway and could in many ways act as a reminder for the talks that dominated the German Federal Election 2005.

Some victories can be costly. Merkel's victory is very much perennial kingmaker FDP's loss. With it banished from the political landscape that the party had occupied since WWII, Merkel is left searching for a coalition partners.

The problem she has here is that the two potential partners - The Green Party and SPD - are both sceptical. SPD is still suffering from having worked with Merkel after former chancellor Gerhard Schröder's political misjudgement in calling an early election in 2005. If it is serious about returning to power in Germany, the party's best strategy would be to form a powerful opposition to Merkel and position its strong grassroots and länder stronghold for the right candidate in 2017.

Presently it seems Hamburg Mayor Olaf Scholz is a name to follow.....

The German newspapers this morning are full of exactly this story: the victory without majority.

"We have experience with the grand coalition, and it's not particularly positive," says North Rhine-Westphalia state premier Hannelore Kraft. "This is an issue that is very difficult in our party."

"The ball is now with Merkel," said SPD General Secretary Andrea Nahles. 

Killing
The SPD's problem in opposition has been that Merkel is more than willing to take its side on SPD causes with the result that she is "killing them" by going left all the time. That highly effective strategy leaves the SPD with no choice in my opinion. Stay strong or disappear.

The party needs to rebuild its confidence and this is better served in opposition than in government. If in doubt, look to the FDP. The FDP is as much part of the "success" of Germany as Merkel, but it is Merkel who has taken all the glory.

But if SPD joins the government, it will insist on strong concessions. The SPD campaigned on social justice issues and help for the working poor, so it would expect a softening of some of its own tough labour reforms from a decade ago and demand a national minimum wage. (Source: Telegraph.co.uk)

On the critical Euro bond issue, SPD tried its hand at openly supporting "more Europe", but its voters reacted so now they are pro with the caveat that its leaders are always stressing that it would mean changing the German Constitution. This link is excellent reading on the SPD's dilemma.

Austerity
The bigger fundamental change should SPD join would be on austerity: Zeit writes: 

"Traditionally, the Socialists are more internationalist-minded than the Union. They would participate in the government but the Merkelsche Austeritätkurs would be terminated."

Whatever government is formed, the underlying economic trend is clear. Germany's victory in the fight against the debt crsis and its self-perception peaked yesterday. From here on in, it's back to work. Merkel will find that the domestic agenda over the next few years will be just as critical as the EU. 

The working poor, the minimum wage, a divided Germany (East vs. West), her party without an heir to her throne, and a Europe where no reforms are still the main driver. And you can add to this that Germany is becoming a hugely expensive place in which to produce due to its energy policy.

The government predicts that the renewable energy surcharge added to every consumer's electricity bill will increase from 5.3 cents today to between 6.2 and 6.5 cents per kilowatt hour. That policy will add 20 percent to the cost of energy this year alone!

German consumers already pay the highest electricity prices in Europe. But because the government is failing to get the costs of its new energy policy under control, rising prices are already on the horizon. Electricity is becoming a luxury good in Germany, and one of the country's most important future-oriented projects is acutely at risk.

Again, when there is an action there is a reaction. Controlling the action is the easy part, the consequences of the reaction is the harder part, as Merkel and German consumers will realise in 2014.

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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