What are the potential implications for the European Union of German general elections?

German elections – a change in the political landscape?

“Angela Merkel’s steadfast grip over Germany could be loosening. In September, Germany holds its general elections. But, unlike last week’s Dutch elections where the populist Freedom Party (PVV) provided mainstream parties a run for their money by placing second, in Germany it isn’t the Populist Party that is a threat to Chancellor Merkel. Rather, Martin Schulz, a newcomer to the race (albeit, in a mainstream party) could be the one contender to nudge Merkel from her post, with interesting implications for Germany and the European Union (EU).”

Enter Martin Schulz, SPD Leader

“The recent appointment of Martin Schulz, ex-President of the European Parliament, as new leader of the SPD party has turned the election on its head. Schulz has a stronger approval rating than the previous SPD leader. Most importantly, he is more popular than Angela Merkel: in a recent poll, 50% of Germans said they would vote for Schulz as Chancellor compared to just 34% for Merkel.

“Since Schulz’s appointment in late January, SPD has enjoyed a boost of around 10% in the polls, putting it neck and neck with CDU/CSU or even slightly ahead. Current polls also suggest that SPD could create a coalition with the Green and Left parties, meaning that a government without CDU/CSU may even be possible – a very significant event in German politics.”

An EU friendly outcome

“The EU is facing some serious challenges, particularly on the world stage. Brexit has made the European project more vulnerable than, perhaps, ever before. The EU’s relationship with the new U.S. administration is decidedly fragile, while its relationship with Russia is one based on rivalry and distrust. In this environment, Merkel’s departure would be a major loss. But Martin Schulz could be considered a reasonable replacement.

“He has a strong commitment to European integration and supports the idea of an economic, financial, fiscal, and political union. He has a greater willingness for risk sharing via a European deposit scheme and even a euro area fiscal stabilization fund. In line with this, Schulz has been outspoken in calling for more flexibility in the EU’s treatment towards Greece and so would be welcomed by the peripheries.”

Change isn’t always bad

“This year’s European elections are considered a key risk for markets. We would argue that investors should be calm about the German election. The Populist Party, AfD is not a threat, while the main contender to Merkel’s leadership is a staunch supporter of EU cohesion. Of course, it could be the novelty factor that is boosting Schulz’s popularity and much can happen between now and the September election – the official campaign is yet to even begin.”

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