The value of investments and any income from them can fall and you may get back less than you invested.

Auf wiedersehen Angela Merkel


With so much excitement and political intrigue at home and in the US, many people will have failed to notice that the sun may be setting on one of the most important eras in post-war European politics.

We write ahead of a weekend deadline in Germany for Angela Merkel and the Christian Democratic Union (CDU) to strike a deal with the Social Democratic Party (SPD) to form a new governing coalition.

Merkel’s 12-year chancellorship may finally be coming to an end. That’s significant because Merkel’s position at the helm of Europe’s biggest economy has made her the continent’s most important leader.

She was the leader who others turned to when Europe suffered an existential debt crisis. The chancellor known as mutti (an affectionate form of mother) has enjoyed popularity that at times vastly outstripped that of her party, the centre-right CDU.

During Merkel’s chancellorship which began in 2005, Germany has seen a decline in its unemployment rate from a post-reunification high of more than 11% to a low of 3.7% last year.

Why might Merkel be on the way out?

While Merkel’s CDU and Christian Social Union (CSU) ally won the 2017 election, they lost a total of 65 seats. Their main rivals and former coalition partners the centre-left SPD did almost as badly.

If there is a lesson to be taken from this humbling result for the political mainstream it is that voters do not reward parties for forming coalitions. So it is perhaps understandable that, following the inconclusive election result, talks to reach a workable agreement have been rumbling on for four months without reaching a conclusion.

Don’t count on a deal being done. It was difficult for the SPD to get permission from its party activists to agree even to start negotiations, as many felt they would be better off spending time in opposition and being able to build their support by opposing the government.

As we write, talks are believed to leave outstanding a number of controversial issues, including the leadership of several key ministries. SPD members were incensed by the CDU’s austere running of the Finance Ministry during several years of growing budget surplus. SPD leader Martin Schulz, the former President of the European Parliament, is rumoured to want the Foreign Ministry while the party’s traditional platform of support for workers would suggest a desire for the Labour and Social Affairs Ministry.

Is economic change on the cards?

Germany owes its recent economic success in large part to its adoption of flexible labour market policies in 2004. A legitimate question is whether these policies might be under threat.

Clearly, regardless of who controls the Labour and Social Affairs Ministry any material change in policy will need to be approved by the whole government. It is also an enduring irony that Germany’s extreme liberalisation of its labour market was implemented by the last SPD chancellor, Gerhard Schroder. The short-term pain caused ultimately handed Merkel the chancellorship and the economic success that has helped her stay there until now.

We don’t believe that there is a consensus for material change of policy on the issues that matter for Europe. Both the CDU and SPD are pro European integration to varying degrees. Both are reasonably consistent in their views on immigration – indeed this is likely the reason they both managed to lose seats at the last election.

What happens next?

Should the talks collapse, this could unsettle investors, who are currently extremely enamoured with the eurozone.

If investors were alarmed by the potential for a break in the status quo an opportunity could arise in the euro, especially as there is a good chance the CDU position would improve. Polling for the centrist FDP has weakened as they have been blamed for the collapse of a previous round of coalition talks.

Recently, support for the SPD has been weakening too. Were a second election held, there is a good chance of Merkel’s CDU winning.

In fact, this would be a better solution for the eurozone. If instead the current coalition talks are successful it would leave the eurosceptic and nationalist Alternative fur Deutschland (AfD) as the official opposition – giving them plenty of airtime and representation on committees.

The talks could collapse this weekend, but if they conclude successfully, there will be a ballot of SPD members and this is seen as the biggest hurdle a new coalition would face. If it stumbles at that point, then we will be looking for any sign of an irrational market reaction.

There has been speculation that the CDU would run with a different candidate in a second election which might be enough to shock investors – though we think this unlikely. In a second election, parties will do what’s necessary to avoid painful coalition talks and a path to a centre-right victory appears to be opening – which ought to please investors considerably.

By Guy Foster, Head of Research Guy leads Brewin Dolphin’s Research team ensuring that a rigorous and exhaustive investment process is employed. He also provides recommendations on tactical investment strategy to Brewin Dolphin’s investment managers and strategic recommendations to the group’s Asset Allocation Committee. Before joining Brewin Dolphin in 2006, Guy was an Investment Director at Hill Martin (Asset Management). Guy has a Masters in Finance from London Business School. He is also a CFA charterholder, holds the CISI Diploma, and is a member of the Society of Business Economists. Guy frequently discusses financial issues with the written and televised media as well as presenting to the staff and clients of Brewin Dolphin.


The value of investments can fall and you may get back less than you invested

If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset.

Past performance is not a guide to future performance.

No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.

The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.

Valued by our clients

With 32 offices across the UK, Channel Islands and Ireland we combine the best of local understanding with national scale and perspective.