Euro lower on German election, chemicals fear political instability

25 September 2017 11:17 Source:ICIS News

Focus article by Jonathan Lopez

Merkel addresses supporters, 24 Sept 2017. Source - Simone Kuhlmey, Pacific Press via ZUMA Wire, REX, ShutterstockGerman Chancellor Angela Merkel addresses supporters on Sunday after her party topped the polls. Source: Simone Kuhlmey/Pacific Press via ZUMA Wire/REX/Shutterstock

LONDON (ICIS)--The lower-than-expected result obtained by German Chancellor Angela Merkel’s party in Sunday's general election in Germany, along with the rise of the far-right, pushed the euro lower on Monday trading, as the necessary coalition talks to form a stable government may prove tedious.

Germany’s chemical trade group VCI said it was concerned that the “far apart” positions from the necessary parties – at least three – needed to form a stable government could slow the action of government as “every week counts” to make the country fit for the future.

The euro was trading against the US dollar at €1:$1.196 before the first exit polls were announced, falling to €1:1.189 on Sunday evening, a level at which the currency was still trading on Monday morning. (see graph from xe.com)

dollar vs euroAgainst the pound sterling, the euro was also lower on Monday morning at £1:€1.138, down from £1:€1.128 recorded immediately before exit polls.

The German stock exchange was, however, trading slightly higher than the close on 22 September, up 0.14% by 10:45 London time. Large chemical corporates from the country were also trading in the positive, with BASF up 0.46% and Bayer up 1.41%.

Evonik and Covestro, however, were trading slightly lower than the last close, down 0.27% and 0.14%.

Preliminary official results put Merkel’s centre-right party CDU/CSU at 33% of the national vote and the centre-left SPD at 20.5%.

However, the return of the far-right to Germany’s parliament occurred at a somewhat stronger-than-expected strength, with the AfD (Alternative for Germany) obtaining 12.6% of the total vote, a result which could grant it near 100 members of parliament (MPs) at the 630-strong Bundestag.

The liberals at the FDP obtained 10.7% of the vote, while the left-leaning Greens obtained 8.9%.

"The result of the election will lead to difficult coalition negotiations. Nevertheless, it must be the goal of the parties to form a stable government quickly, even if many positions are far apart,” said VCI’s director general Utz Tillmann.

“Every week counts when it comes to making Germany fit for the future. Constantly rising electricity costs and the backlog of investment in education, digitalisation and transport infrastructure can only be met with a government capable of acting."

However, analysts expect the future weeks to be convulsive. Merkel could easily form again a coalition with the SPD, but analysts have pointed that would leave the AfD as the largest opposition party.

Merkel is likely to try to form a coalition with the FDP and the Green party, analysts have said, although the two small parties have irreconcilable differences in economics and EU-related issues.

For instance, the national chemical trade VCI is likely to find support from FDP for its demand to lower electricity costs for its member companies through reforms at the renewables-related taxes they have to pay.

The Greens' intentions are unlikely to lean towards freeing chemical companies – or any other corporate, for that matter – of any taxing burden.

In EU-related affairs, the FDP does not think more fiscal and economic integration would be needed, as long as other southern eurozone countries do not get into line with Germany’s rather austere approach to economics.

The Greens, on the other hand, believe the eurozone needs to be improved by giving way to a true fiscal union where equality among member countries gains terrain.

“The FDP are known to be against further eurozone integration, which will be one of the key takeaways from the election. The FDP leader Christian Lindner has indicated a willingness to join in coalition talks, but said that ‘We want to organise a change of direction for our country’ and also tweeted that ‘€60bn [of the] eurozone budget flowing into France or Italy is inconceivable for us... a line in the sand’,” said London-based analysts at Germany’s Deutsche Bank on Monday.

“Meanwhile, a leading Green politician told broadcaster ZDF that talks will be ‘very hard, we are far apart on many issues’… [France’s President Emmanuel] Macron turned to Merkel for support to strengthen the euro area with a new integration push. ‎However, her capacity to reciprocate may be a lot more limited now.”

Germany woke up on Monday to a new reality, somehow the loss of its post-war impeccable innocence and liberal policies. The battle the liberal western establishments fought in 2016 against populists seems to be still alive, although the pillars of the system are still not threatened by extremist parties.

However, Germany’s reunification in 1989 and the equalising of wealth from west to east is still a long way ahead. AfD performed well with its anti-muslim and anti-migrant message in many eastern states (landers), with the far-right surpassing Merkel's party in some of them, with scores of nearly 30%.

The Chancellor recognised that fact on Sunday night when addressing supporters, aware that unemployment in the east is much higher than in the west.

Merkel, however, has all along stood by her 2015 decision to allow the entry of more than one million refugees into the country when violence in Syria was at its peak. The still-very-low employment rates among the newcomers, as well as Germany’s 2016 terrorist attacks, soured the mood in Merkel’s welcoming Germany.

“Markets are still absorbing the news [election results], but so far the euro is down against the US dollar, German bond yields are little changed and peripheral bond yield spreads are slightly higher. European equities have opened a little lower too. Overall a slight feeling of disappointment from financial markets this morning,” said analysts at investment fund Heartwood Investment.

By Jonathan Lopez