Simon Ward, Chief Economist at Janus Henderson Investors, shares his views on the German federal election result, which reflected a shift right within German politics, and its ramifications for European monetary policy and markets.
The German election results have dashed French President Macron’s hopes of a strengthened Franco-German alliance driving further European Union/eurozone integration. A weakened Angela Merkel must now enter probably tortuous negotiations with the Free Democratic Party (FDP) and the Greens. Any deal is expected to require Ms Merkel to cede her ally Wolfgang Schäuble’s position as finance minister to the FDP, which opposes deeper burden-sharing and is in favour of mechanisms to allow sovereign default and European Economic and Monetary Union (EMU) exit. There is a risk of no deal and new elections. The rightward shift in German politics will make it much more difficult for European Central Bank President Draghi to extend effective monetary financing to fiscally-weak countries, via quantitative easing, refinancing operations or other programmes, should funding markets close again. The rallies in the euro and peripheral equities and bonds following President Macron’s victory in May are now vulnerable to reversal.