Column: German Greens change market calculation
Five months is a long time in German politics, but a surge of support for the Green Party ahead of the September federal election caused the markets to tighten the numbers to gauge its likely role in the next ruling coalition.
Record German stock prices, soaring EU carbon permit prices and less negative German debt yields all have other factors among the hopes and end of the pandemic shocks of the past 12 months. But they can also feed in part on the Green Party’s extraordinary push in the polls in recent weeks.
Investors rarely hold their breath for the clarity of German election results, as coalitions often take months to form, even after the September poll results are known.
But with the resignation of Conservative Chancellor Angela Merkel after 16 years, there will somehow be a new leader of the world’s fourth largest economy.
Over the past decade in Europe and around the world, this kind of uncertainty has generally resulted in criticism of extremist fringe parties or populist disruptors.
But as the Berlin Chancellery is about to change hands, support is growing for the already popular and largely centrist Greens and their top candidate Annalena Baerbock.
Reflecting what now appears to be a transatlantic priority to finally tackle climate change after the pandemic, Green’s level of support has made him the biggest party in two of the last three national opinion polls, ahead of Bloc and Center Center-right CDU / CSU. -the social democrats on the left.
This represents a great upheaval of the status quo; Deutsche Bank noted that if the polls were correct, it would be the first election since World War II that the combined CDU / CSU and SPD vote would not be a majority.
Even with warnings about the accuracy of the polls and the shifting political sands, Deutsche believes: “It is no longer unlikely that 40-year-old Baerbock could become the first Green Chancellor.”
Most banks now see Greens in government of one shade or another after September.
Hence all the color-coded speculation about the different permutations that could see anything from a “Kiwi” coalition – involving a Green-led government with black CDU / CSU – to a mix of “traffic lights” of green, red and yellow SPD of the Liberal Free Democratic Party.
Citi strategists say the Greens should be at least the second strongest party and figure in any new government. UBS Global Wealth Management calls this “extremely likely”.
“The participation of the government of the Greens is very likely, with them possibly in the kingmaker position,” Morgan Stanley said.
Why should the markets care?
“Easier taxation anyway,” he added. “The balance of power has probably shifted in favor of the Greens.”
LIFT THE DEBT BRAKE?
Greater investment spending in green infrastructure and closer integration of the European Union are ground rules for greener influence.
But the details of the green manifesto raise a whole raft of market-related issues.
Citi calculates that the green proposals for 50 billion euros per year in additional public investment over 10 years would represent about 1.5% of production in 2019. If scaled to the US economy, that would amount to an increase in demand of $ 3 trillion – paid in part by tax increases.
Like the new US administration of President Joe Biden, the Greens are talking about a 25% corporate tax, a 1% wealth tax for holders of more than 2 million euros and higher income tax.
Morgan Stanley said the success of the green polls could lead to a longer suspension of Germany’s constitutional “debt brake” – which limits structural federal deficits to 0.35% of gross domestic product – and possibly even a wholesale reform to allow more capital spending while keeping the cover regularly. expenses.
JPMorgan economist Greg Fuzesi cited a 2019 Green Party article, co-authored by Baerbock, which supported tax-financed current spending and balanced state budgets, but more investment in long term funded by public entities.
Fuzesi said the Greens essentially wanted to align Germany’s unilateral debt brake with EU rules that allow structural deficits of 1% of GDP when overall debt is below 60% of GDP. That alone would mean an additional 23 billion euros for these public investment vehicles.
And yet, all of this came within the framework of relatively conservative fiscal projections that predict a decline in national debt / GDP to 40% over time as long as the described investment spending also picks up growth.
“The differences between German centrist parties are often exaggerated,” he concluded.
Eye-catching green policies on Europe include the permanent integration of the EU’s post-pandemic recovery fund into the EU budget so that the bloc can invest in the next ‘green transition’.
This would, he hopes, reduce the pressure on the European Central Bank – which could then adopt a dual mandate of price stability and low unemployment, just like the US Federal Reserve.
For markets drunk with the pandemic shock and its enormous impact on economic policies, the green plan may even appear marginal apart from the environmental investments evident in themselves.
Citi argues that higher German yields and pro-EU policies could be positive for the euro’s exchange rate and offset US “exceptionalism” related to Washington’s stimulus spending.
But its greatest implication may be to shape the broader ‘return to normal’ over many years – and perhaps to help circumvent the slowdown in growth that followed the last global economic shock 12 years ago. .
The author is editor-in-chief for finance and markets at Reuters News. All opinions expressed here are his.
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