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How the German federal election result could affect you

22 August 2017FXPoliticsEconomics
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How the German federal election result could affect you

  • The German federal election takes place on 24 September 2017
  • Investors can expect a broad effect on global financial markets
  • All statistics and predictions are based on Citi analyst research, current as of 4th August 2017*

24 September 2017 will see the citizens of Germany head to the polls to decide who will lead the country as Chancellor for the next four years. As Europe's largest economy, the outcome of this election will naturally affect the future performance of financial markets far beyond German borders. Here, we summarise events so far in the run up to the German federal election and how the results could affect you.

Who's running in the German federal election?

There are two main candidates for German Chancellor: current leader Angela Merkel and newcomer Martin Schulz. Merkel heads up the centre-right leaning Christian Democratic Union (CDU), which is in the same parliamentary group as its sister party, the Christian Social Union. The CDU was founded post-World War II and has been in power for the majority of the years since.

Citi analysts expect Angela Merkel to remain chancellor for another four years, with Chancellor Merkel's CDU and its Bavarian sister party CSU currently polling around 39%*. That said, this year is the first time that Merkel's position has been realistically challenged in its 11-year duration. In March, the Social Democratic Party (SDP) – the CDU's largest opposition – unanimously elected former president of the European parliament Martin Schulz as their leader. Dubbed "Sankt Martin" – which needs little translation – Schulz is a similar figure to Jeremy Corbyn in the German political landscape, if somewhat closer to the centre than the Englishman in terms of policies.

Indeed, the so-called "Schulz effect" saw the SDP draw up level in popularity with the CDU in early 2017, prompting pundits to anticipate the tightest race in years. More recent polls have turned back in Merkel's favour however, with the SDP currently polling around 24%*. It seems that voters are now seeking stability in this turbulent period in world politics, and with a month to go until Election Day, the SDP appear to face an uphill struggle when it comes to knocking the CDU from power.

No significant radical party has so far polled above 10% either, so a Merkel loss is looking very unlikely at this point.*

How will the German federal election affect the UK economy?

The UK's financial relationship with Germany has long flourished as one of the strongest in the Eurozone, and so political uncertainty as a result of the federal election could have a widespread impact. Germany is the UK's second-largest export destination, while the UK is in Germany's top three, a relationship that has run smoothly through EU trade policy.

Of course, while Britain's exit from the EU will have a strong impact on this relationship, the new chancellor will also play a large role in deciding future trade agreements.

How could a new Chancellor affect UK & European equities?

In 2013, Merkel overtook Margaret Thatcher's record to become Europe's longest ever serving female leader, and she has campaigned for Germany to play a major role in the EU for over a decade. A CDU victory in the September election would likely see her continue to champion the vitality of the unified member states. That could mean that Britain will take a hit in terms of trade deals, with UK equities floundering in the shadow of European prosperity.

However, there remains the chance that the "Schulz effect" could take a surprise hold on the country, and the SDP leader could find himself matching Merkel at the polls. Should this happen, he will likely need to form a coalition with one of the fringe governments to get over the line. Such political uncertainty could lead to a weaker Eurozone. A weak Eurozone could lead to problems with all markets, including the UK.

A change in Chancellor would not only jeopardise the current, strong Eurozone, but also throw a curveball into the strained relationship between Germany and the US, thus affecting global markets as a whole. As in the UK election, financial analysts will await exit polls with interest, despite the expectation of a Merkel win. Whatever the result, Sunday 24 September will undoubtedly play a pivotal role in the future of world finance.

How could a new Chancellor affect foreign exchange?

Recent reduced political risks and good economic performance means the Eurozone is in a strong position currently. A Merkel loss could rattle this and therefore reduce the strength of the euro as a currency.

"An unexpected surprise [in the election outcome] could lower the sentiment in Eurozone recovery and therefore put pressure the currency", says Citi Portfolio Counsellor, Deepak Kumar.

Regarding the effect of the German federal election on the pound, Deepak says, "Though the GBP is more influenced by domestic political events and the Brexit process, uncertainty in Eurozone [as a result of a Merkel loss] is likely to impact the pound as well."

If you'd like to find out how the German federal election could affect your portfolio or foreign exchange, your Relationship Manager will be happy to help.

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