The main German media reported it on Sunday evening: the extreme right has reached its first electoral victory in the country since World War II. The Alternative for Germany (AfD) party became the most voted party in the elections held this Sunday in the German state of Thuringia and was close to victory in those of Saxony. In addition to the victory of this party which distinguished itself by its criticism of immigration and the European project, the setback suffered by the coalition in power at the federal level (Social Democrats, Greens and Liberals) and the surprise For the traditional right (the CDU), the results also put Sahra Wagenknecht’s alliance, a split from the left-wing Die Linke party, in a good position, which ranges from communist economic policy to the anti-immigration rhetoric of the AfD. Even if the real effects of these elections remain to be measured (a cordon sanitaire towards the AfD is to be expected), what happened dictates a very clear message about the possible and immediate future of Germany – increasingly in crisis – and, consequently, of the European Union. However, financial markets have barely reacted (stock markets are barely falling and because weak activity data in China and the development of employment in the United States in August are more worrying) and the euro didn’t even flinch (In fact, it is increasing because of the weakness shown by the dollar on Monday in anticipation of the Federal Reserve’s rate cuts. But… how long will this be the case?
“Why should a currency trader in Connecticut or Singapore care what the people of Saxony or Thuringia vote in a state election? At first glance, this seems far-fetched. So it is not surprising at first glance that the foreign exchange market started “This morning, with exactly the same euro levels with which it ended on Friday, if you think about it a little more, it is no longer so clear,” begins Ulrich Leuchtmann, currency strategist at Commerzbank, in his newsletter on Monday.
“There is no need to imagine a scenario in which EU-sceptical parties are growing stronger (although it is probably more convincing today). Even today, in some political areas, the strengthening of these political movements forces established political parties – who fear further losses of voters – to make concessions,” the analyst emphasizes.
With the French legislative elections Last July, concerns about a possible victory for Marine Le Pen’s National Rally were allayed to wait forjust like it happened with the European elections in June. But what happened in Germany is once again ringing alarm bells. “Germany is facing a declining economy and growing criticism over arms aid to Ukraine. The fact that Germany and France – the EU’s leading duo – are moving towards increasing political instability and weakness should worry the entire EU,” write strategists at Swedish bank SEB in their morning analysis.
All this leads the Commerzbank economist to wonder whether, in the hypothetical case of a new eurozone crisisA German government would be willing to implement a bailout policy similar to what happened between 2010 and 2012. “Of course, a new Eurozone crisis is not currently expected. However, shouldn’t the lack of mechanisms to combat this crisis worsen? the risk premium of euro positions at any time? After all, a car without a seat belt is considered dangerous, and not only when a collision is imminent. And one thing is also clear: even if Bunds are the refuge of the Eurozone, there are some. There is practically no chance of a government-organized bailout without Germany’s participation,” Leuchtmann elaborates.
In this situation, the German finds only one brake, the European Central Bank (ECB): “We must bear in mind that in 2012 it was not the governments that finally succeeded in combating the crisis. Their measures were not energetic enough. Perhaps because even then some governments (including the German one) did not want to impose the “whatever the cost” on their own electorate. The redemptive “whatever the cost” had to come from the ECB. It is the ECB that provides the support that prevents a critical escalation of the sovereign bond market.”
“As long as the foreign exchange market believes that this will not change even if the parties critical of the EU become stronger, it has no reason to revalue the euro because of certain election results. If in the future there were a reason to revise this opinion – and I dare not predict whether this will happen – even the election results in the German states would be relevant for the foreign exchange market,” Leuchtmann concludes.
economic paralysis
For now, while waiting for negotiations between parties to begin and for the AfD’s real options for entering regional governments to be known, All the spotlights are on Berlin amid the economic paralysis that the German economy is experiencing and the aforementioned social debate around supporting Ukraine in a war that has left the European locomotive without its best industrial asset: cheap Russian gas. The viability of the current weak executive or the speculations about who will form the next one (the strength of the AfD will set the tone) are already direct scenarios that affect the European project.
“All of the above will increase tensions within the government coalition in Berlin. One year before the next federal elections, Risk of early federal elections increases. However, in ING’s base case, none of the three coalition partners will take over. Why? Because they have very little to gain from early elections. The budget for 2025 is set and Chancellor Olaf Scholz has often said that Germans will see the benefits of the government’s policy measures next year. There have been many good opportunities to end the coalition, but it never happened,” says Carsten Brzeski, chief macroeconomic strategist at ING Research.
In a note to clients, Brzeski suggests that one way out for the ruling coalition could be to press the reset button on economic policy and announce a large investment programwith short- and long-term benefits for the economy (and his voters). But, he warns, it would require a huge effort from all three parties, with no clear indication of which of them would ultimately benefit. Moreover, it would require new budget negotiations. “Instead, a more likely solution would be a reshuffle of ministerial positions. That’s easier to implement with much less impact,” he envisions.
From Capital Economics, analyst Franziska Palmas believes that these regional results will lead to the formation of governments with more and more parties from across the political spectrum, which It will be difficult to reach agreements on budgets and major changes in economic policy. “This probably means that budget negotiations will become increasingly tense; that the German state will do little to counter deindustrialisation; and that German governments will continue to advocate for a fairly tight fiscal policy, both at national and international EU level,” he concluded.
The tide reaches the shores
In addition to the debate on immigration, rekindled by events such as the jihadist attack a few days ago in the city of Solingen, the country’s weak economic situation is making headlines. The languorous trajectory of GDP since the pandemic, the reluctance of Germans to spend due to a lack of confidence, the poor business climate, even slightly high inflation or the severe correction in real estate after the ECB’s abrupt rate hikes were the main causes. most common topics. Now the tide has reached the shores.
THE Risk provisions at the country’s top lenders have increased by nearly 50% in the first half of the year, and many banks have cited distressed corporate and consumer lending as the main reason. The consensus among entities is that before things get any better, they’re going to get worse.
“Geopolitical uncertainties will continue to affect the economy as a whole in the remaining months of the year,” DZ Bank said in its results presentation on Thursday. The bank, Germany’s second-largest by assets, quadrupled its risk provisions compared with the same period a year earlier. Most other banks also set aside more money.
