Brewing German Elections

To many, September in Germany likely means Oktoberfest—high quality beer, schnitzels of varying types and sausages. But this September has another tasty treat: German Parliamentary elections, with the primary contest pitting current Chancellor Angela Merkel’s center-left Christian Democratic Union (CDU) against the Social Democratic Party’s (SDP) Peer Steinbrück. The consensus expectation is for a Merkel re-election, but in our view, this is a sign of something more important. As we’ve seen incremental improvements across the eurozone, easing political pressures in Germany are further evidence the region isn’t headed toward a dreaded sudden splintering.

Currently, Merkel leads the polls by a significant margin (CDU ranges from 38-42 and SPD ranges from 22-26), and it’s not surprising sentiment seems to be in her favor—for several reasons. While dealing with the ongoing eurozone crisis has felled many a eurozone leader, Merkel has been consistently popular at home. (Not as much abroad, but we digress.) A feat achieved by consistently positioning herself as the strict paymistress of Europe—at least, that’s her public persona. The strict face plays well to her German base, which opposes giving a blank check to troubled peripheral nations they perceive as profligate. But behind the scenes, she has deftly wheeled and dealed with other leaders—usually taking a tough stance at first, only to bend and reach some sort of agreement by the end. Exhibits 1 and 2 are both Greece. And it seems there may be another Greek example.

Wednesday, Germany’s Finance Minister Wolfgang Schäuble noted Greece may need yet another bailout. The only really surprising feature about Schäuble’s statement is he didn’t wait until after September’s vote. Regardless, Merkel seems poised to get re-elected, in our view. And Schäuble probably sees even if Steinbrück pulls off a major upset victory, it doesn’t seem to change Germany’s path moving forward much. Despite differing opinions on austerity and certain social issues, both candidates have shown a similar commitment to the eurozone over the past several years. So though providing Greece with more funds isn’t necessarily favorable in Germany, re-electing Merkel or electing Steinbrück likely leaves little uncertainty as to future actions and reduced political uncertainty—a plus for stocks and the economy. But easing political uncertainty is only one of many reasons we’d suggest the region is faring better than expected.

Recently, Germany has experienced rising sovereign debt interest costs. Though this means borrowing is becoming more expensive, in our view, it seemingly reflects improved sentiment and economic conditions more than anything negative. Germany’s Manufacturing and Services PMIs rose for the fourth straight month in August, helping to lead the eurozone into positive growth territory. Germany was never as badly off as the periphery, of course. But it was weak for a spell, and its acceleration likely boosts economic performance of the bloc in aggregate. And in turn, a strengthening German economy and the eurozone emerging from recession would be a tailwind to Angela’s chances next month, too.

Of course we won’t really know the outcome until Election Day. However, whichever plays out, in our view, Germany and the eurozone seem to be faring better than many feared. And that the eurozone presents less of a global economic and market headwind today is a factor worthy of a hearty “Prost!”