Are we seeing a dramatic shift in German politics?

After winning the German presidency for her fourth term, Angela Merkel must weld a coalition government or have a minority rule with the most far-right politicians seen in 50 decades.

The outcome of the vote was expected to not only be a weathervane for European political ideology but had the potential to shake foreign exchange markets.

However, the value of the euro, that was previously skyrocketing, has cooled slightly possibly due Merkel’s weaker position. But the rise of the far right AfD (Alternative für Deutschland ) party to third place is thought to signal a dramatic change in Germany’s political landscape.

“The result is unlikely to impact sterling, or the wider foreign exchange (FX) market, in any significant way,” Lee McDarby, managing director for UK corporate FX and international payments at Moneycorp tells GTNews.

“The same may also be said for Germany’s stance on Brexit negotiations, however the makeup of the governing coalition is still uncertain and this might influence the Germans’ negotiating position.

“For financial services firms considering plans to move from London to Frankfurt, Merkel’s victory will only provide more certainty for those who have already made the decision to relocate”

“For financial services firms considering plans to move from London to Frankfurt, Merkel’s victory will only provide more certainty for those who have already made the decision to relocate,” argues McDarby.

“We may well see Germany focus its efforts on enhancing EU integration, in order to benefit EU-based firms,” he predicts.

Given the unpredictability of democratic votes over the last 15 months, Moneycorp advised treasurers to consider their market exposures and potentially hedge any relevant exposures before the election in order to mitigate FX risk.

“The polls have been wrong on more than one occasion recently, so caution should be a key driver to consider all outcomes,” says McDarby.

“The FDP openly opposes Macron’s reform proposals”

Many commentators have argued the real race in the German election as over who came in third place.

The far-right AfD (Alternative für Deutschland) party won over the Free Democrats (FDP) and the far-left Die Linke.

Leopold Traugott, political analyst at Open Europe, argued in a recent blog post that Merkel will face a tough challenge in forming a coalition, as, “contrary to past elections, there is no “Wunschkoalition” (ideal coalition) on offer this time”.

The selection of a new junior coalition partner will have important implications for Germany’s support for Eurozone and domestic reform.

The FDP and Die Linke embrace most of Macron’s demands on Eurozone reform, “and would likely shift a German government to a more amicable position towards Paris […] The FDP openly opposes Macron’s reform proposals,” writes Traugott.

“What is clear, however, is that the next German government will again be centrist and decidedly pro-European. While the AfD and Die Linke, two anti-centrist Eurosceptic parties, will enter Germany’s federal parliament, neither has any real chance of co-governing.

“Still, the rise of the AfD signals a dramatic change in Germany’s political landscape”, Traugott concludes.


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