This website uses cookies in order to improve user experience. If you close this box or continue browsing, we will assume that you are happy with this. For more information about the cookies we use or to find out how you can disable cookies, see our Cookies Notice.

The collapse of German coalition talks

So far, the market impact has been limited, and rightly so, we would argue

Last night, Germany's Liberals (FDP) surprisingly pulled the plug on talks to form a new government. In recent weeks, key stumbling blocks included Germany's energy and immigration policies (notably whether to reinstate the right of recognized refugees for their family members to join them in Germany). These areas brought the policy differences between Chancellor Angela Merkel's centrist Christian Democratic Union (CDU), its more right-wing Bavarian sister party, the Christian Social Union (CSU), the market-friendly Liberals, and the environmentalist Green Party into sharp focus. But even in other areas, notably fiscal and broader environmentalist policy, coming to a coalition agreement was always expected to be difficult.

So far, the market impact has been limited, and rightly so, we would argue. The euro weakened slightly against the dollar, benefitting German exporters. Partly as a result, the German equity market was broadly flat overall. At the sector level, German carmakers and utility stocks rose on relief that the Greens are now less likely join the government and push for more strident measures on climate change.

These modest movements are in line with our view that not all that much changed overnight. After all, Germany's post-war constitution was explicitly drafted to ensure the country remains governable no matter what. In particular, it provides powerful incentives for parliamentary parties to try to find a consensus, while creating formidable obstacles to snap elections to the Bundestag, the lower house of the German parliament. Through the strong role of the Bundesrat, the upper house of the German government, it also frequently forces the government to look for support beyond its coalition ranks.

As acting Chancellor, Angela Merkel will remain in power, for now. In coming days, she will probably try to convince the center-left Social Democratic Party (SPD), still its partner in the current, acting government, to start talks on a new coalition agreement. Leading Social Democrats figures have repeatedly and energetically ruled this out. However, the Social Democrats may come under enormous pressure in coming days to change their mind. Depending on the public reaction, the Liberals might also decide to come back to the negotiation table.

Failing that, Article 63 of the German constitution leaves two potential outcomes. The arguably more likely one is a minority government. Under this scenario, Christian Democrats and Christian Socials would nominate a candidate for Chancellor, probably Ms. Merkel. If Ms. Merkel cannot secure majority backing in the Bundestag, the Bundestag has 14 days to vote for another candidate. After that, Ms. Merkel could be elected by a simple plurality. In that case, it is up to Germany's President to either accept the formation of the new – minority – government or to dissolve parliament.

We think it is unlikely that in such a scenario, President Frank-Walter Steinmeier would actually dissolve parliament, which would trigger new elections to the Bundestag within 60 days. And, once elected, a new minority administration might actually prove rather more stable than a multi-party coalition. The reason is that under Germany's constitution, the opposition can only oust a Chancellor with a "constructive vote of no confidence". This means Germany's fragmented opposition would need to align on an alternative candidate first.

In Germany, forming such a minority administration following an indecisive election would be unprecedented. In the short term, it might also raise some eyebrows among its European allies in Brussels and potentially cause some market ripples. In principle, however, we think it could well prove sustainable and result in a continuation of the status quo. Big, and necessary, reforms, notably to Germany's pension and educational systems, would be unlikely in coming years. But with Germany's economy firing out of all cylinders, it might take a while for markets to fret about that.

Related Articles

Feb 23, 2018 New Chart of the week

Chart of the week

Valuation multiples for the S&P 500 are stretched

Feb 13, 2018 CIO Flash

We remain constructive

Our December 2018 targets, slightly revised.

Feb 09, 2018 Equity

German equities – what else?

German equities have become even more appealing after the correction.

Feb 09, 2018 Chart of the week

Chart of the week

Back to the "old normal"

Feb 06, 2018 CIO Flash

Back to normality

A market correction was arguably overdue. We remain optimistic.

Feb 06, 2018 Investment Traffic Lights

Investment traffic lights

Our tactical and strategic view

Jan 26, 2018 Chart of the week

Chart of the week

Why the recent rally on Wall Street might well continue

Jan 19, 2018 Chart of the week

Chart of the week

Are German shares still attractive? A look at the Dax price index.

Jan 05, 2018 Investment Traffic Lights

Investment traffic lights

Our tactical and strategic view

Dec 08, 2017 Investment Traffic Lights

Investment traffic lights

Our tactical and strategic view

Dec 07, 2017 Letter to Investors

Beware of euphoria

We enter 2018 with optimism. High market expectations make us cautious, though.

Dec 07, 2017 Forecasts

Our forecasts

All forecasts at a glance

Dec 07, 2017 Multi Asset

Equities, what else?

We have positioned ourselves for late cycle.

Dec 07, 2017 Equity

Constructive but vigilant

Equities still have room, but risks are growing.

Dec 07, 2017 Alternatives

Quality merchandise

Some strategies still offer upside while providing downside protection

Dec 07, 2017 Focus Topic

Continuing bull market?

What hurdles could cause the bull to stumble?

Nov 08, 2017 Investment Traffic Lights

Investment traffic lights

Our tactical and strategic view

Nov 02, 2017 Macro Outlook

U.S. tax reform

Trump has promised the biggest tax reform ever. We expect considerably less.


Please let us know what you think about this article/page.