Germany Election: All the most likely scenarios suggest support for the euro – MUFG

Last night we had the final TV debate before the federal elections in Germany on Sunday. The FX markets have played little attention to the German election in the belief that policy differences on Europe and fiscal policy are not large enough to greatly alter the economic outlook going forward, economists at MUFG Bank report.

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SPD remains in pole position to lead new coalition

“A ‘traffic-light’ coalition comprising of the SPD, the Greens and the FDP seems most likely but the TV debate last night revealed policy differences between the Greens and the SPD on issues covering China and Nord Stream and energy supply in general so it seems likely that similar to previous recent elections, it could take considerable time before we have a new government.”

“A shift to the left with Die Linke doing better than expected that points to a possible coalition with the SPD and the Greens would perhaps be the biggest surprise and could result in the initial focus being on more expansionary fiscal policy with a slower return to fiscal discipline. However, offsetting that would be concerns over less business-friendly pro-growth policies that would have been expected under a coalition with the FDP.”

“All the most likely scenarios do suggest some level of growth-orientated policies being put into action which should help reinforce the favourable macroeconomic outlook in the eurozone that is currently being helped by the roll-out of NGEU fiscal spending, which got underway in August.”

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