Greener Post-Election Germany Likely, but Limited Fixed Income Impact

The German election results are in, and the Social Democratic Party (SPD) received the largest share of the vote for parliamentary seats—25.7%—beating the Christian Democratic Union (CDU) party of outgoing Chancellor Angela Merkel and its coalition partner the Christian Social Union (CSU), which received 24.1%. The Green Party received 14.8% of the vote, and the Liberal Free Democratic Party (FDP) received 11.5%. Germany’s government is typically comprised of a coalition, and a new one will take some time to form—in 2017, the process took more than five months. Merkel will remain in her current position until that happens.

Now, the real work begins in terms of what type of coalition there will be. The Green Party wants to be part of the coalition, and as the name implies, its aim is more greening of the economy—which requires more spending to finance. Meanwhile, the FDP tends to be a little bit more fiscally austere, which will probably be a countering force. That probably means we will see a modest fiscal expansion and probably more greening of the German economy and infrastructure, which is seen as positive. The far left won’t be part of the government, so there will be spending, but a big spending budget which would potentially upset the bond market won’t likely happen.

Having a three-way coalition is inherently less stable than just two parties as there may be competing priorities and opinions that make it more difficult to enact policy, particularly new initiatives. And, it could mean the new chancellor will not be as strong as previous ones. What’s interesting to note is that we have seen a return of a more centrist leaning in Germany—as the far left and far right didn’t do as well as in prior years. Whether that becomes a pattern elsewhere in the world remains to be seen.

As far as the Bund market and German interest rates, the market impact of the results looks limited, but if we do have a European crisis or geopolitical crisis in the future, vulnerability may surface given a lack of a strong leader to keep Europe together, leading to potential market volatility. We could see more power shift to Brussels and in that sense, the European Union should remain in a good position, but we could see more bickering than usual without that strong leadership force out of Germany.

For the near term, the European Central Bank’s actions are the greater focus for the bond market, so that’s what we are keeping an eye on for now.

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