German elections with more losers than winner

After Sunday’s German elections, it seems much easier to point out the losers than the winners.

Alternative für Deutschland got 4.9% of votes according to the preliminary results late Sunday evening and was thus really close to the 5% threshold for representation in the Bundestag but nevertheless failed.

FDP failed too. With just 4.6% of votes, down from 14.6 % at the previous election, they not only lost every 10th German voter, they are no longer represented in the Bundestag.

Angela Merkel’s CDU/CSU got 42.1% of votes – an 8.3% gain – and thus she looks like the big winner. It seems that she is just one or two seats from having a majority on her own. But without FDP represented in the Bundestag she will probably have to seek a grand coalition with the opposition party SPD. Merkel has not ruled out a grand coalition, but would have been much happier if she could have continued with the incumbent coalition formation.

So SPD is the winner? No, not really. They had their second worst election result since World War II with just 26.5 % of votes and a grand coalition with CDU/CSU is not what they hoped for. The last time SPD joined a grand coalition with Merkel in 2005-9, their popularity plummeted to the lowest level in the post-war era and many in SPD fear it could happen again.

Nevertheless, we think that the end result after lengthy negotiations will eventually be a grand CDU/CSU – SPD coalition. But SPD is likely to demand a high price. After all, history has shown it can be potentially risky to become Merkel’s coalition partner.

We think that there is a clear winner after all: the euro area. The euro sceptics did not get a voice in the German Bundestag and SPD is at least as strong a proponent of EU and the euro as CDU/CSU. If SPD becomes coalition partner, it is likely that there will be a small shift in German foreign policy towards using less sticks and more carrots for peripheral countries. The likelihood that Germany will give both Greece and Portugal additional help and eventually accept debt forgiveness for Greece has probably gone up. The conditions for this may also prove to be less harsh with more focus on growth-promoting policies than austerity. We think that at this stage of the crisis this increases the likelihood that euro area countries can gain enough growth momentum to enter a positive spiral and leave the debt crisis behind.

On Monday morning we could see a tempered risk off reaction in financial markets. In the short term, the risk of lengthy negotiations – that could take months – could create some uneasiness among investors. It is understandable if market participants are concerned that Germany might not be able to act quite as quickly and decisively as usual as long as negotiations are ongoing. However, in the longer run we think that today’s outcome is positive. The risk that the debt crisis could resurface has probably gone down.