The German elections of 2021 and why they are important for the markets


Dark clouds loom over the financial district as the spread of coronavirus disease (COVID-19) continues in Frankfurt, Germany, March 16, 2021. REUTERS / Kai Pfaffenbach

It is rare for Germany’s elections to be exciting and market-moving events, but the September 26 election may prove to be the exception if its outcome completes the transformation of a nation long married to austerity into a big spendthrift.

The election will end Angela Merkel’s 16-year tenure as the head of Europe’s largest economy, and the Greens have a chance to become the main party in the national government for the first time in its 40-year history .

The implications could range from more environmentally focused spending to greater euro area cohesion. German bond yields have risen since the Greens nominated their first candidate for chancellor amid heightened electoral uncertainty and the perception that an increase in budget spending could be on the way.

“A government led by the Greens would be a historic change for Germany, a country so far characterized by a culture of high political stability, moderation and centrism,” said Barbara Boettcher, head of European policy research at Deutsche Bank. the election means for the markets:

1 / AUF WIEDERSEHEN AUSTERITY

The COVID crisis has seen Germany pull back from fiscal prudence, but under the Greens the country may well say ‘auf wiedersehen’ (goodbye) to austerity for good.

The Greens want 500 billion euros ($ 600 billion) in new spending over the next decade and reform the Constitutional debt brake rule, which limits net annual federal borrowing to 0.35% of economic production.

Tailored to the U.S. economy, the plans correspond to $ 3 trillion in spending or 1.5 percent of 2019 GDP, according to Citi, which is comparable to U.S. President Joe Biden’s agenda.

The Greens also pledge to work to relax the European Union’s budgetary rules to stimulate investment, make the EU’s recovery fund permanent and transform the European Stability Mechanism’s rescue fund into a fund that provides grants. unconditional credit lines to Member States.

If economic growth picks up, it could bring interest rate hikes closer together and boost the euro.

2 / NO MORE BREAKAGE

The Greens want closer European budgetary integration, so that entry into the German national government would mitigate the risks of the eurozone breaking up.

The risks are reflected in Italian 10-year bond yields, which are more than 100 basis points above German equivalents, according to ING Bank. ING expects this spread to narrow to 75 basis points over the next few months.

3 / SAFE AND GREEN OBLIGATIONS

More bond issues are inevitable to fund the proposed spending. It would change the “paradigm” that has depressed German bond yields for years, says ING.

Even if coalition partners ultimately limit green plans, issuing additional debt is expected to alleviate the region’s shortage of “safe” assets, which has weakened the euro’s reserve currency status.

Making the EU recovery fund permanent would further expand the safe asset pool for the euro, as it is backed by joint bond sales.

Adding to the offering of highly rated bonds, “any scarcity fears … would reduce a lot,” said Annalisa Piazza, bond research analyst at MFS Investment Management.

Germany is also likely to issue more green bonds to finance environmental spending. Read more

4 / GREEN REVOLUTION

The Greens are in favor of reducing CO2 emissions by 70% instead of 55% by 2030, as well as increasing taxes on emissions and targeting 100% renewable energy by 2030.

Wind and solar energy companies stand to benefit, as should the auto industry, which is trying to challenge the world’s leading electric vehicle, Tesla.

Also watch real estate, as the Greens could call for tighter rent controls. Higher corporate taxes could hit small and mid-cap stocks focused on the domestic market.

“Building coalitions may involve finding compromises in potentially contentious policy areas, including housing,” UBS analysts wrote, although they consider a carbon tax to be manageable for real estate companies. such as Vonovia (VNAn.DE) and Deutsche Wohnen (DWNG.DE)).

5 / COMMERCIAL TENSIONS?

Some green foreign policy proposals represent a shift from Merkel’s conservative stance, potentially increasing tensions with Russia and China.

The party wants to withdraw its political support for an almost complete German-Russian gas pipeline operating under the Baltic Sea. Find out more.

Annalena Baerbock, candidate for chancellor of the Greens, also asserts that liberal democracies must defend their values ​​so that Europe can, for example, consider banning certain products from China.

“Merkel has been a great success in foreign policy, therefore any change … will weaken Germany as a whole and likely increase tensions at the margins,” said Steen Jakobsen, CIO of Saxo Bank.

The Greens also say they oppose an arbitrary increase in defense spending to the 2% of GDP mandated by NATO, key for defense contractor Rheinmetall (RHMG.DE), although his actions may still benefit of any push to modernize the German army.

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